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Filed pursuant to Rule 497
Registration No. 333-158211

PROSPECTUS SUPPLEMENT
(To Prospectus dated January 26, 2010)

21,000,000 Shares

LOGO

Common Stock



                We are offering for sale 21,000,000 shares of our common stock.

                Ares Capital Corporation is a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland. We have elected to be regulated as a business development company under the Investment Company Act of 1940. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component. To a lesser extent, we also make equity investments.

                We are externally managed by Ares Capital Management LLC, an affiliate of Ares Management LLC, a global alternative asset manager and SEC registered investment adviser that as of December 31, 2009 managed investment funds with approximately $33 billion of committed capital. Ares Operations LLC, an affiliate of Ares Management LLC, provides the administrative services necessary for us to operate.

                Our common stock is traded on The NASDAQ Global Select Market under the symbol "ARCC." On January 26, 2010, the last reported sales price of our common stock on The NASDAQ Global Select Market was $12.90 per share. The net asset value per share of our common stock at September 30, 2009 (the last date prior to the date of this prospectus supplement on which we determined net asset value) was $11.16.

                Investing in our common stock involves risks that are described in the "Risk Factors" section beginning on page 26 of the accompanying prospectus, including the risk of leverage.

                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 it for future reference. Our Internet address is www.arescapitalcorp.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 or the "SEC." The SEC also maintains a website at www.sec.gov that contains such information.



 
 
Per Share
 
Total
 

Public offering price

  $ 12.75   $ 267,750,000  

Underwriting discount (sales load)

  $ 0.6375   $ 13,387,500  

Proceeds, before expenses, to Ares Capital Corporation(1)

  $ 12.1125   $ 254,362,500  
(1)
Before deducting expenses payable by us related to this offering, estimated at $0.6 million.

                The underwriters may also purchase up to an additional 3,150,000 shares from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus supplement to cover overallotments. If the underwriters exercise this option in full, the total public offering price will be $307,912,500, the total underwriting discount (sales load) paid by us will be $15,395,625, and total proceeds, before expenses, will be $292,516,875.

                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.

                The shares will be ready for delivery on or about February 1, 2010.

BofA Merrill Lynch
            J.P. Morgan
                        SunTrust Robinson Humphrey
                                      Wells Fargo Securities
                                                    BB&T Capital Markets
                                                                BMO Capital Markets
                                                                            Deutsche Bank Securities
                                                                                         Morgan Stanley

                                                                                                    UBS Investment Bank



The date of this prospectus supplement is January 26, 2010.


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

Prospectus Supplement
TABLE OF CONTENTS

 
  Page

Forward-Looking Statements

  S-1

The Company

  S-2

Fees and Expenses

  S-8

Use of Proceeds

  S-12

Price Range of Common Stock and Distributions

  S-13

Capitalization

  S-15

Underwriting

  S-16

Legal Matters

  S-22

Prospectus
TABLE OF CONTENTS

 
  Page

Prospectus Summary

  1

The Company

  1

Offerings

  14

Fees and Expenses

  16

Selected Condensed Consolidated Financial Data of Ares Capital

  20

Unaudited Selected Pro Forma Condensed Consolidated Financial Data

  24

Unaudited Pro Forma Per Share Data

  25

Risk Factors

  26

Forward-Looking Statements

  53

Unaudited Pro Forma Condensed Consolidated Financial Statements

  54

Use of Proceeds

  81

Price Range of Common Stock and Distributions

  82

Ratios of Earnings to Fixed Charges

  84

Management's Discussion and Analysis of Financial Condition and Results of Operations

  85

Senior Securities

  112

Business

  113

Pending Allied Acquisition

  130

Portfolio Companies

  132

Management

  140

Certain Relationships and Related Transactions

  160

Control Persons and Principal Stockholders

  162

Determination of Net Asset Value

  163

Dividend Reinvestment Plan

  165

Certain Material U.S. Federal Income Tax Considerations

  167

Description of Securities

  176

i


 
  Page

Description of Our Capital Stock

  176

Sales of Common Stock Below Net Asset Value

  184

Issuance of Warrants or Securities to Subscribe For or Convertible Into Shares of Our Common Stock

  189

Description of Our Preferred Stock

  190

Description of Our Subscription Rights

  191

Description of Our Warrants

  192

Description of Our Debt Securities

  194

Regulation

  206

Custodian, Transfer and Dividend Paying Agent and Registrar

  212

Brokerage Allocation and Other Practices

  212

Plan of Distribution

  213

Legal Matters

  215

Independent Registered Public Accounting Firm

  215

Available Information

  215

Financial Statements

  F-1

ii


Table of Contents


FORWARD-LOOKING STATEMENTS

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

              We use words such as "anticipates," "believes," "expects," "intends," "will," "should," "may" and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and condition could differ materially from those implied or expressed 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.

              The forward-looking statements included in this prospectus supplement have been based on information available to us on the date of this prospectus supplement, 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.

              The forward-looking statements in this prospectus supplement and the accompanying prospectus are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Exchange Act.

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THE COMPANY

              This summary highlights some of the information contained elsewhere in this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all of the information that you may want to consider. You should read carefully the more detailed information set forth under "Risk Factors" in the accompanying prospectus 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" or "investment adviser" refers to Ares Capital Management LLC; "Ares Administration" refers to Ares Operations LLC; and "Ares" refers to Ares Partners Management Company LLC and its affiliated companies (other than portfolio companies of its affiliated funds), including Ares Management LLC.

Ares Capital

              Ares Capital, a Maryland corporation, is a specialty finance company that is a closed-end, non-diversified management investment company. We have elected to be regulated as a business development company, or a "BDC," under the Investment Company Act of 1940, or the "Investment Company Act." We were founded on April 16, 2004, were initially funded on June 23, 2004 and completed our initial public offering on October 8, 2004. We are one of the largest BDCs with approximately $8 billion of total committed capital under management, including available debt capacity (subject to leverage restrictions) and managed funds.

              Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in U.S. middle-market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive. However, we may from time to time invest in larger companies. In this prospectus supplement, we generally use the term "middle market" to refer to companies with annual EBITDA (earnings before interest, taxes, depreciation and amortization) of between $10 million and $250 million. As discussed in "Recent Developments" below, on October 26, 2009, we entered into a definitive agreement (the "Merger Agreement") under which we have agreed, subject to the satisfaction of certain closing conditions, to acquire Allied Capital Corporation ("Allied Capital") in an all stock transaction, which we refer to as the "Allied Acquisition." We cannot assure you that the Allied Acquisition will be consummated as scheduled, or at all, and any investment decision you make should be made independent of the consummation of the Allied Acquisition. See "Pending Allied Acquisition" in the accompanying prospectus for a description of the terms of the Allied Acquisition, "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" in the accompanying prospectus for a description of the risks associated with a failure to consummate the Allied Acquisition and "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition" in the accompanying prospectus for a description of the risks that the combined company may face if the Allied Acquisition is consummated.

              We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component like warrants. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Mezzanine debt is subordinated to senior loans and is generally unsecured. Our debt investments have ranged between $10 million and $100 million each, although the investment sizes may be more or less than the targeted range. Our investment sizes are expected to grow with our capital availability and, if completed, upon consummation of the Allied Acquisition. To a lesser extent, we also make equity investments. Each of our equity investments have generally been less than $20 million, but may grow with our capital availability and are usually made in conjunction with loans we make to these portfolio companies.

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              The proportion of these investments will change over time given our views on, among other things, the economic and credit environment we are operating in. In connection with our investing activities, we may make commitments with respect to indebtedness or securities of a potential portfolio company substantially in excess of our final investment. In such situations, while we may initially agree to fund up to a certain dollar amount of an investment, we may syndicate a portion of such amount to third parties, such that we make a smaller investment than what was reflected in our original commitment.

              The first and second lien senior loans generally have stated terms of three to 10 years and the mezzanine debt investments generally have stated terms of up to 10 years, but the expected average life of such first and second lien loans and mezzanine debt is generally between three and seven years. However, we may invest in securities with any maturity or duration. The debt that we invest in typically is not initially rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than "Baa3" by Moody's Investors Service or lower than "BBB-" by Standard & Poor's). We may invest without limit in debt of any rating, as well as debt that has not been rated by any nationally recognized statistical rating organization.

              We believe that our investment adviser, Ares Capital Management, 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 has been in existence for more than 12 years and its senior principals have an average of over 20 years experience investing in senior loans, high yield bonds, mezzanine debt and private equity securities. The Company has access to the Ares staff of approximately 110 investment professionals and to over 150 administrative professionals employed by Ares who provide assistance in accounting, legal, compliance, operations, technology and investor relations.

              While our primary focus is to generate current income and capital appreciation through investments in first and second lien senior loans and mezzanine debt and, to a lesser extent, equity securities of eligible portfolio companies, we also may invest up to 30% of our portfolio in opportunistic investments of non-eligible portfolio companies. Specifically, as part of this 30% basket, we may invest in debt of middle-market companies located outside of the United States, in investment funds that are operating pursuant to certain exceptions to the Investment Company Act, in advisers to similar investment funds and in debt and equity of public companies that do not meet the definition of eligible portfolio companies because their market capitalization of publicly traded equity securities exceeds the levels provided for in the Investment Company Act. We expect that these public companies generally will have debt that may be non-investment grade. From time to time we may also invest in high yield bonds, which, depending on the issuer, may or may not be included in the 30% basket.

              In addition to making investments in the Ares Capital portfolio, our portfolio company, Ivy Hill Asset Management, L.P. ("IHAM"), manages three unconsolidated senior debt funds, Ivy Hill Middle Market Credit Fund, Ltd. ("Ivy Hill I"), Ivy Hill Middle Market Credit Fund II, Ltd. ("Ivy Hill II") and the Ivy Hill Senior Debt Fund, L.P. and related vehicles ("Ivy Hill SDF" and, together with Ivy Hill I and Ivy Hill II, the "Ivy Hill Funds") and serves as the sub-adviser/sub-manager for four others: CoLTS 2005-1 Ltd., CoLTS 2005-2 Ltd., CoLTS 2007-1 Ltd and FirstLight Financial Corporation, or "FirstLight." As of December 31, 2009, IHAM had total committed capital under management of over $2.3 billion.

              We and GE Commercial Finance Investment Advisory Services LLC also co-manage an unconsolidated senior debt fund: the Senior Secured Loan Fund LLC (formerly known as the Unitranche Fund LLC), or the "SL Fund."

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              As of September 30, 2009, we had invested over $4.0 billion in debt and equity investments since our inception with a total realized internal rate of return to Ares Capital of approximately 17%. Internal rate of return is the unlevered internal rate of return on our portfolio company exits from October 8, 2004 through September 30, 2009. Internal rate of return is the discount rate that makes the net present value of all cash flows related to a particular investment equal to zero. Internal rate of return is gross of expenses related to investments as these expenses are not allocable to specific investments. Investments are considered to be exited when the original investment objective has been achieved through the receipt of cash and/or non-cash consideration upon the repayment of our debt investment or sale of an investment, or through the determination that no further consideration was collectible and, thus, a loss may have been realized. These internal rate of return results are historical results relating to our past performance and are not necessarily indicative of future results, the achievement of which cannot be assured.

About Ares

              Founded in 1997, Ares is a global alternative asset manager and SEC registered investment adviser with approximately $33 billion of total committed capital and over 250 employees as of December 31, 2009.

              Ares specializes in originating and managing assets in both the leveraged finance and private equity markets. Ares' leveraged finance activities include the origination, acquisition and management of senior loans, high yield bonds, mezzanine debt and special situation investments. Ares' private equity activities focus on providing flexible, junior capital to middle-market companies. Ares has the ability to invest across a capital structure, from senior floating rate debt to common equity. This flexibility, combined with Ares' "buy and hold" philosophy, enables Ares to structure an investment to meet the specific needs of a company rather than the less flexible demands of the public markets.

              Ares is comprised of the following groups:

              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

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on preservation of capital, diversification and active portfolio management. These fundamentals underlie Ares' investment strategy and have resulted in large pension funds, banks, insurance companies, endowments and high net worth individuals investing in Ares' funds.

Ares Capital Management

              Ares Capital Management, our investment adviser, is served by a dedicated origination and transaction development team of approximately 34 investment professionals led by the partners of Ares Capital Management, Michael Arougheti, Eric Beckman, Kipp deVeer, Mitchell Goldstein and Michael Smith. Ares Capital Management leverages off of Ares' entire investment platform and benefits from the significant capital markets, trading and research expertise of all of Ares' investment professionals. Ares funds currently hold over 700 investments in over 30 different industries. Ares Capital Management's investment committee has nine members, including the partners of Ares Capital Management and Senior Partners of Ares' Capital Markets Group and Private Equity Group.

Recent Developments

Allied Acquisition

              On October 26, 2009, we entered into a definitive agreement to acquire Allied Capital in an all stock transaction valued at $862 million, or approximately $4.61 per Allied Capital share as of January 20, 2010. The boards of directors of both companies have each unanimously approved the Allied Acquisition.

              Allied Capital is an internally managed BDC. Allied Capital invests in primarily private middle-market companies in a variety of industries through long-term debt and equity capital instruments.

              While there can be no assurances as to the exact timing, or that the Allied Acquisition will be completed at all, we are working to complete the Allied Acquisition in the first quarter of 2010. The consummation of the Allied Acquisition is subject to certain conditions, including, among others, Allied Capital stockholder approval, Ares Capital stockholder approval, receipt of certain Ares Capital and Allied Capital lender consents and other customary closing conditions.

              On January 14, 2010, Prospect Capital Corporation ("Prospect Capital") proposed to Allied Capital to acquire all of the issued and outstanding shares of Allied Capital in a stock-for-stock merger. On January 19, 2010, the Board of Directors of Allied Capital unanimously rejected the offer. On January 26, 2010, Prospect Capital renewed its proposal and increased it proposed share exchange ratio from 0.385 Prospect Capital shares for each Allied Capital Share to 0.40 Prospect Capital shares for each Allied Capital Share.

              We cannot assure you that the Allied Acquisition will be consummated as scheduled, or at all (including as a result of any competing offer), and any investment decision you make should be made independent of the consummation of the Allied Acquisition. See "Pending Allied Acquisition" in the accompanying prospectus for a more detailed description of the terms of the Allied Acquisition, "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" in the accompanying prospectus for a description of the risks associated with a failure to consummate the Allied Acquisition and "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition" in the accompanying prospectus for a description of the risks that the combined company may face if the Allied Acquisition is consummated.

Unitranche Fund Acquisition

              In a separate transaction, on October 30, 2009, we completed our acquisition of Allied Capital's interests in the SL Fund for $165 million in cash. The SL Fund was formed in December 2007 to invest in "unitranche" loans of middle-market companies and has approximately $3.6 billion of

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committed capital, approximately $900 million in aggregate principal amount of which is currently funded. Of the $2.7 billion of unfunded committed capital, approximately $350 million would be funded by us. Since our acquisition of Allied Capital's interest in the SL Fund, we have made one investment in the SL Fund of $11.6 million. Our investment entitles us to a coupon of LIBOR plus 8.0% and certain other sourcing and management fees. In addition, our underlying investment also entitles us to a substantial portion of the excess cash flows from the underlying loan portfolio.

Ivy Hill SDF Acquisition

              On December 29, 2009, we made an incremental investment in IHAM to facilitate our acquisition of Allied Capital's management rights in respect of, and interests in, the Allied Capital Senior Debt Fund (now referred to as "Ivy Hill SDF"), for approximately $33 million in cash. Ivy Hill SDF currently has approximately $294 million of committed capital invested primarily in first lien loans and to a lesser extent, second lien loans of middle-market companies. IHAM manages Ivy Hill SDF and receives fee income and potential equity distributions in respect of interests that it acquired in Ivy Hill SDF.

Revolving Credit Facility

              On January 22, 2010, we entered into an agreement to amend and restate our senior secured revolving credit facility (the "Revolving Credit Facility"). The Revolving Credit Facility, among other things, increased the size of the facility from $525 million to $690 million (comprised of $615 million in commitments on a stand-alone basis and an additional $75 million in commitments contingent upon the closing of the Allied Acquisition), extended the maturity date to January 22, 2013, modified pricing and added provisions to permit certain mergers, including the Allied Acquisition. Subject to certain exceptions, pricing under our prior revolving credit facility was based on LIBOR plus 1.00% or on an "alternate base rate" (which is the highest of a prime rate, the federal funds rate plus 0.50%, or one month LIBOR plus 1.00%). Subject to certain exceptions, pricing under the Revolving Credit Facility is based on LIBOR plus an applicable spread of between 2.50% and 4.00% or on the "alternate base rate" plus an applicable spread of between 1.50% and 3.00%, in each case based on a pricing grid depending on our credit rating. The effective LIBOR spread under the Revolving Credit Facility on January 22, 2010 was 3.00%. The Revolving Credit Facility is secured by substantially all of our assets (subject to certain exceptions, including investments held by certain of our subsidiaries).

              The Revolving Credit Facility includes an "accordion" feature that allows us, under certain circumstances, to increase the size of the Revolving Credit Facility to a maximum of $897.5 million prior to the closing of the Allied Acquisition, and up to a maximum of $1.05 billion upon the closing of the Allied Acquisition.

Amendment to CP Funding Facility

              On January 22, 2010, we combined our existing $225 million amortizing Ares Capital CP Funding LLC facility (the "CP Funding Facility") with our existing $200 million revolving CP Funding II LLC facility (together, the "CP Funding Facilities"), both with Wachovia Bank, National Association, into a single $400 million revolving securitized facility. In connection with the combination, we entered into an Amended and Restated Purchase and Sale Agreement with Ares Capital CP Funding Holdings LLC, our wholly owned subsidiary ("CP Holdings"), pursuant to which we will sell to CP Holdings certain loans that we have originated or acquired, or will originate or acquire (the "Loans") from time to time, which Loans CP Holdings will subsequently sell to Ares Capital CP Funding LLC, a wholly owned subsidiary of CP Holdings ("Ares Capital CP"). The CP Funding Facility is secured by all of the assets held by Ares Capital CP and the membership interest in Ares Capital CP.

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              The combined CP Funding Facility, among other things, extended the maturity date to January 22, 2013 (with two one-year extension options, subject to mutual consent and modified pricing) and pre-approved the Allied Acquisition. Subject to certain exceptions, the interest charged on the CP Funding Facility is based on LIBOR plus an applicable spread of between 2.25% and 3.75% or on a "base rate" (which is the higher of a prime rate, or the federal funds rate plus 0.50%) plus an applicable spread of between 1.25% to 2.75%, in each case, based on a pricing grid depending upon our credit rating. The effective LIBOR spread under the CP Funding Facility on January 22, 2010 is 2.75%.

Fourth Quarter Credit Performance

              On a preliminary basis, we do not expect any new non-accruing loans for the quarter ending December 31, 2009. We currently estimate that our non-accruing loans as a percentage of our portfolio at fair value and cost to decline from 1.7% and 5.3%, respectively, for the quarter ending September 30, 2009 to less than 1.0% and 3.5%, respectively, for the quarter ending December 31, 2009. In addition, we estimate that total loans on non-accrual status declined from seven loans for the quarter ending September 30, 2009 to five loans for the quarter ending December 31, 2009. These estimates are provided for informational purposes only and actual data may be higher or lower than these estimates. The Company's Board of Directors, which retains the ultimate authority for valuing our assets, may reach a different conclusion than these estimates. See "Determination of Net Asset Value" in the accompanying prospectus for further information regarding the determination of fair value.

Other Investment Activity and Estimated Leverage Ratio

              As of January 15, 2010, we had made $381.8 million of investments (including $10 million of agreements to fund revolving credit facilities or delayed draw loans) since September 30, 2009. Of these investments, approximately 27% were made in first lien senior secured debt, 62% in senior subordinated debt and 11% in equity/other securities. Of these investments, 27% bear interest at floating rates with a weighted average stated rate of LIBOR plus 11% and 64% bear interest at fixed rates with a weighted average stated rate of 17%. As of January 15, 2010, we had exited $423.9 million of investments and commitments (including $105 million of unfunded revolving credit facility commitments or delayed draw loans) since September 30, 2009. Of these investments, approximately 48% were first lien senior secured debt, 13% were second lien senior secured debt, 36% were senior subordinated debt and 2% were equity securities. Of these investments, 19% bear interest at floating rates with a weighted average stated rate of LIBOR plus 7% and 79% bear interest at fixed rates with a weighted average stated rate of 12%.

              In addition, as of January 21, 2010, we had an investment backlog and pipeline of $137.7 million and $214.9 million, respectively. We expect to syndicate a portion of these investments and commitments to third parties. The consummation of any of the investments in this backlog and pipeline depends upon, among other things: satisfactory completion of our due diligence investigation of the prospective portfolio company, our acceptance of the terms and structure of such investment and the execution and delivery of satisfactory transaction documentation. We cannot assure you that we will make any of these investments or that we will syndicate any portion of our investments and commitments.

              We currently estimate that our debt to equity ratio, net of cash and cash equivalents, was in a range of 0.675x to 0.75x for the quarter ending December 31, 2009. These estimates are provided for informational purposes only and actual data may be higher or lower than these estimates. The Company's Board of Directors, which retains the ultimate authority for valuing our assets, may reach a different conclusion than these estimates. See "Determination of Net Asset Value" in the accompanying prospectus for further information regarding the determination of fair value.

Our Corporate Information

              Our administrative offices are located at 2000 Avenue of the Stars, 12th Floor, 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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FEES AND EXPENSES

              The following table is intended to assist you in understanding the costs and expenses that an investor in our common stock will bear directly or indirectly, based on the assumptions set forth below. 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 or accompanying prospectus contains a reference to fees or expenses paid by "you," "us," "the Company" 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

    5.00 %(1)

Offering expenses borne by us

    0.22 %(2)

Dividend reinvestment plan expenses

    None (3)
       

Total stockholder transaction expenses paid by us

    5.22 %
       

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

       

Management fees

    2.10 %(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)

    2.16 %(6)

Interest payments on borrowed funds

    1.69 %(7)

Other expenses

    1.41 %(8)

Acquired fund fees and expenses

    0.03 %(9)
       

Total annual expenses (estimated)

    7.39 %(10)
       

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

(2)
Amount reflects estimated offering expenses of approximately $0.6 million and based on the 21,000,000 shares offered in this offering.

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

(4)
"Consolidated net assets attributable to common stock" equals net assets at September 30, 2009 plus the anticipated net proceeds from this offering.

(5)
Our management fee is currently 1.5% of our total assets other than cash and cash equivalents (which includes assets purchased with borrowed amounts). For the purposes of this table, we have assumed that we maintain no cash or cash equivalents and that the management fee will remain at 1.5% as set forth in our current investment advisory and management agreement. We may from time to time decide it is appropriate to change the terms of the agreement. Under the Investment Company Act, any material change to our investment advisory and management agreement must be submitted to stockholders for approval. The 7.39% reflected on the table is calculated on our net assets (rather than our total assets). See "Management—Investment Advisory and Management Agreement" in the accompanying prospectus.

(6)
This item represents our investment adviser's incentive fees based on annualizing actual amounts earned on our pre-incentive fee net income for the nine months ended September 30, 2009 and assumes that the incentive fees earned for the nine months ended September 30, 2009 will be based on the actual realized capital gains as of September 30, 2009, computed net of realized capital losses and unrealized capital depreciation. It also assumes that this fee will remain constant

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(7)
"Interest payments on borrowed funds" represents an estimate of our annualized interest expenses based on actual interest and credit facility expense incurred for the nine months ended September 30, 2009. During the nine months ended September 30, 2009, our average borrowings were $865 million and cash paid for interest expense was $15.1 million. We had outstanding borrowings of $767.9 million at September 30, 2009. This item is based on our assumption that our borrowings and interest costs after an offering will remain similar to those prior to such offering. The amount of leverage that we employ at any particular time will depend on, among other things, our investment adviser's and our board of directors' assessment of market and other factors at the time of any proposed borrowing. See "Risk Factors—Risks Relating to our Business—We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing with us" in the accompanying prospectus.

(8)
Includes our overhead expenses, including payments under the administration agreement based on our allocable portion of overhead and other expenses incurred by Ares Administration in performing its obligations under the administration agreement. Such expenses are based on annualized "Other expenses" for the nine months ended September 30, 2009. See "Management—

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(9)
The Company's stockholders indirectly bear the expenses of underlying investment companies in which the Company invests. This amount includes the fees and expenses of investment companies in which the Company is invested in as of September 30, 2009. Certain of these investment companies are subject to management fees, which generally range from 1% to 2.5% of total net assets, or incentive fees, which generally range between 15% to 25% to net profits. When applicable, fees and expenses are based on historic fees and expenses for the investment companies and for those investment companies with little or no operating history, fees and expenses are based on expected fees and expenses stated in the investment companies' offering memorandum, private placement memorandum or other similar communication without giving effect to any performance. Future fees and expenses for these investment companies may be substantially higher or lower because certain fees and expenses are based on the performance of the investment companies, which may fluctuate over time. The amount of the Company's average net assets used in calculating this percentage was based on average net assets of $1.1 billion for the nine months ended September 30, 2009.

(10)
"Total annual expenses" as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The SEC requires that the "Total annual expenses" percentage be calculated as a percentage of net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period), rather than the total assets, including assets that have been funded with borrowed monies.

Example

              The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we would have no additional leverage, that none of our assets are cash or cash equivalents, and that our annual operating expenses would remain at the levels set forth in the table above. Transaction expenses are not included in the following example.

 
  1 year   3 years   5 years   10 years  

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return(1)

  $ 54   $ 160   $ 266   $ 527  

(1)
The above illustration assumes that we will not realize any capital gains computed net of all realized capital losses and unrealized capital depreciation. The expenses you would pay, based on a $1,000 investment and assuming a 5% annual return resulting entirely from net realized capital gains (and therefore subject to the capital gain incentive fee), and otherwise making the same assumptions in the example above, would be: 1 year, $64; 3 years, $189; 5 years, $312; and 10 years, $611. However, cash payment of the capital incentive fee would be deferred if during the most recent four full calendar quarter period ending on or prior to the date the payment set forth in the example is to be made, the sum of (a) our aggregate distributions to our stockholders and (b) our change in net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) was less than 8.0% of our net assets at the beginning of such period (as adjusted for any share issuances or repurchases).

              The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less

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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, if our board of directors authorizes and we declare a cash dividend, 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.

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USE OF PROCEEDS

              We estimate that the net proceeds we will receive from the sale of 21,000,000 shares of our common stock in this offering will be approximately $253.8 million (or approximately $291.9 million if the underwriters fully exercise their overallotment option), in each case at the public offering price of $12.75 per share, after deducting the underwriting discounts and commissions of $13.4 million (or approximately $15.4 million if the underwriters fully exercise their overallotment option) payable by us and estimated offering expenses of approximately $0.6 million payable by us.

              We expect to use the net proceeds of this offering to repay or repurchase outstanding indebtedness under the Revolving Credit Facility ($490.7 million outstanding as of January 22, 2010). The interest charged on the indebtedness incurred under the Revolving Credit Facility is based on LIBOR (one, two, three or six month) plus an applicable spread of between 2.50% and 4.00%. As of January 22, 2010, the one, two, three and six month LIBOR were 0.23%, 0.24%, 0.25% and 0.38%, respectively, and the effective LIBOR spread was 3.00%. The Revolving Credit Facility expires on January 22, 2013.

              We intend to use the remaining net proceeds from this offering for general corporate purposes, which includes investing in portfolio companies in accordance with our investment objective and strategies and market conditions. Investing in portfolio companies could include investments in our investment backlog and pipeline that as of January 21, 2010, were approximately $137.7 million and $214.9 million, respectively. Please note that the consummation of any of the investments in this backlog and pipeline depends upon, among other things: satisfactory completion of our due diligence investigation of the prospective portfolio company, our acceptance of the terms and structure of such investment and the execution and delivery of satisfactory transaction documentation. Our primary focus is to generate current income and capital appreciation through investments in first and second lien senior loans and mezzanine debt, and, to a lesser extent, equity securities of eligible portfolio companies. In addition to such investments, we may invest up to 30% of our portfolio in opportunistic investments of non-eligible portfolio companies. As part of this 30%, we may invest in debt of middle-market companies located outside of the United States. Pending such investments, we will invest a portion of the net proceeds primarily in cash, cash equivalents, U.S. government securities and other high-quality short-term investments. These securities may earn yields substantially lower than the income that we anticipate receiving once we are fully invested in accordance with our investment objective. As a result, we may not be able to achieve our investment objective and/or pay any dividends during this period or, if we are able to do so, such dividends may be substantially lower than the dividends that we expect to pay when our portfolio is fully invested. If we do not realize yields in excess of our expenses, we may incur operating losses and the market price of our shares may decline. See "Regulation—Temporary Investments" in the accompanying prospectus for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objective.

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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

              Our common stock is traded on The NASDAQ Global Select Market under the symbol "ARCC." Our common stock has historically traded at prices both above and below its net asset value. It is not possible to predict whether the common stock offered hereby will trade at, above, or below net asset value. See "Risk Factors—Risks Relating to Offerings Pursuant to this Prospectus—Our shares of common stock currently trade at a discount from net asset value and may continue to do so in the future, which limits our ability to raise additional equity capital" in the accompanying prospectus.

              The following table sets forth the net asset value per share of our common stock, the range of high and low closing sales prices of our common stock as reported on The NASDAQ Global Select Market, the closing sales price as a percentage of net asset value and the dividends or distributions declared by us for each fiscal quarter since our initial public offering. On January 26, 2010, the last reported closing sales price of our common stock on The NASDAQ Global Select Market was $12.90 per share, which represented a premium of approximately 15.6% to the net asset value per share reported by us as of September 30, 2009.

 
   
   
   
   
   
  Cash
Dividend/
Distribution
Per
Share(3)
 
 
   
  Price Range   High
Sales Price
to Net Asset
Value(2)
  Low
Sales Price
to Net Asset
Value(2)
 
 
  Net Asset
Value(1)
 
 
  High   Low  

Year ended December 31, 2008

                                     
 

First Quarter

  $ 15.17   $ 14.39   $ 12.14     94.9 %   80.0 % $ 0.42  
 

Second Quarter

  $ 13.67   $ 12.98   $ 10.08     95.0 %   73.7 % $ 0.42  
 

Third Quarter

  $ 12.83   $ 12.60   $ 9.30     98.2 %   72.5 % $ 0.42  
 

Fourth Quarter

  $ 11.27   $ 10.15   $ 3.77     90.1 %   33.5 % $ 0.42  

Year ending December 31, 2009

                                     
 

First Quarter

  $ 11.20   $ 7.39   $ 3.21     66.0 %   28.7 % $ 0.42  
 

Second Quarter

  $ 11.21   $ 8.31   $ 4.53     74.1 %   40.4 % $ 0.35  
 

Third Quarter

  $ 11.16   $ 11.02   $ 7.04     98.7 %   63.1 % $ 0.35  
 

Fourth Quarter

    *   $ 12.71   $ 10.21     *     *   $ 0.35  

Year ending December 31, 2010

                                     
 

First Quarter (through January 26, 2010)

    *   $ 14.19   $ 12.77     *     *     (4 )

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

(2)
Calculated as the respective high or low closing sales price divided by net asset value.

(3)
Represents the dividend or distribution declared in the relevant quarter.

(4)
As of the date hereof, no dividend has been declared for this quarter.

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

              We currently intend to distribute quarterly dividends or distributions to our stockholders. Our quarterly dividends or distributions, if any, will be determined by our board of directors.

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              The following table summarizes our dividends and distributions declared to date:

Date Declared
  Record Date   Payment Date   Amount  

December 16, 2004

  December 27, 2004     January 26, 2005   $ 0.30  
                 
 

Total declared for 2004

            $ 0.30  
                 

February 23, 2005

  March 7, 2005     April 15, 2005   $ 0.30  

June 20, 2005

  June 30, 2005     July 15, 2005   $ 0.32  

September 6, 2005

  September 16, 2005     September 30, 2005   $ 0.34  

December 12, 2005

  December 22, 2005     January 16, 2006   $ 0.34  
                 
 

Total declared for 2005

            $ 1.30  
                 

February 28, 2006

  March 24, 2006     April 14, 2006   $ 0.36  

May 8, 2006

  June 15, 2006     June 30, 2006   $ 0.38  

August 9, 2006

  September 15, 2006     September 29, 2006   $ 0.40  

November 8, 2006

  December 15, 2006     December 29, 2006   $ 0.40  

November 8, 2006

  December 15, 2006     December 29, 2006   $ 0.10  
                 
 

Total declared for 2006

            $ 1.64  
                 

March 8, 2007

  March 19, 2007     March 30, 2007   $ 0.41  

May 10, 2007

  June 15, 2007     June 29, 2007   $ 0.41  

August 9, 2007

  September 14, 2007     September 28, 2007   $ 0.42  

November 8, 2007

  December 14, 2007     December 31, 2007   $ 0.42  
                 
 

Total declared for 2007

            $ 1.66  
                 

February 28, 2008

  March 17, 2008     March 31, 2008   $ 0.42  

May 8, 2008

  June 16, 2008     June 30, 2008   $ 0.42  

August 7, 2008

  September 15, 2008     September 30, 2008   $ 0.42  

November 6, 2008

  December 15, 2008     January 2, 2009   $ 0.42  
                 
 

Total declared for 2008

            $ 1.68  
                 

March 2, 2009

  March 16, 2009     March 31, 2009   $ 0.42  

May 7, 2009

  June 15, 2009     June 30, 2009   $ 0.35  

August 6, 2009

  September 15, 2009     September 30, 2009   $ 0.35  

November 5, 2009

  December 15, 2009     December 31, 2009   $ 0.35  
                 
 

Total declared for 2009

            $ 1.47  
                 

              To maintain our status as a regulated investment company, or a "RIC," we must timely distribute an amount equal to at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses, out of the assets legally available for distribution for each year. To avoid certain excise taxes imposed on RICs, we are generally required to distribute during each calendar year an amount at least equal to the sum of (i) 98% of our ordinary income for the calendar year, plus (ii) 98% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, plus (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years. If this requirement is not met, we will be required to pay a nondeductible excise tax equal to 4% of the amount by which 98% of the current year's taxable income exceeds the distribution for the year. The taxable income on which an excise tax is paid is generally carried forward and distributed to stockholders in the next tax year. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, as required. Our excise tax benefit for the nine months ended September 30, 2009 was approximately $30,000 and $100,000 for the year ended December 31, 2008. We cannot assure you that we will achieve results that will permit the payment of any cash distributions.

              We maintain an "opt out" dividend reinvestment plan for our common stockholders. As a result, if we declare a cash dividend, then stockholders' cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically "opt out" of the dividend reinvestment plan so as to receive cash dividends. See "Dividend Reinvestment Plan" in the accompanying prospectus.

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CAPITALIZATION

              The following table sets forth (1) our actual capitalization at September 30, 2009 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 underwriters' overallotment option) at the public offering price of $12.75 per share, after deducting the underwriting discounts and commissions and offering expenses payable by us. You should read this table together with "Use of Proceeds" and our balance sheet included elsewhere in this prospectus supplement.

 
  As of September 30, 2009
(unaudited, dollar amounts
in thousands)
 
 
  Actual   As Adjusted  

Cash and cash equivalents

  $ 61,469   $ 61,469  
           

Debt

             

CP Funding Facility

    223,027     223,027  

Revolving Credit Facility

    271,091     17,329  

CP Funding II Facility

         

CLO Notes under the Debt Securitization

    273,753     273,753  
           

Total Debt

    767,871     514,109  

Stockholders' Equity

             

Common stock, par value $.001 per share, 200,000,000 common shares authorized, 109,592,728 and 130,592,728 common shares issued and outstanding, respectively(2)

  $ 110   $ 131  

Capital in excess of par value

    1,505,031     1,758,772  

Accumulated undistributed net investment income

    (2,436 )   (2,436 )

Accumulated net realized loss on investments, foreign currency transactions and extinguishment of debt

    (2,397 )   (2,397 )

Net unrealized loss on investments and foreign currency transactions

    (277,717 )   (277,717 )
           

Total stockholders' equity

  $ 1,222,591   $ 1,476,353  
           

Total capitalization

  $ 1,990,462   $ 1,990,462  
           

(1)
The above table reflects indebtedness outstanding as of September 30, 2009. However, as of January 22, 2010, our total outstanding indebtedness was approximately $973.5 million. The net proceeds from the sale of our common stock in this offering are expected to be used to pay down outstanding indebtedness under the Revolving Credit Facility.

(2)
Figures do not include 351,946 shares issued under our Dividend Reinvestment Plan on December 31, 2009. As of January 22, 2010, Ares Capital has 300,000,000 common shares authorized.

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UNDERWRITING

              Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., SunTrust Robinson Humphrey, Inc. and Wells Fargo Securities, LLC are acting as representatives of each of the underwriters named below. Subject to the terms and conditions set forth in a purchase agreement among us and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the number of shares of common stock set forth opposite its name below.

                           Underwriter
 
Number
of Shares

Merrill Lynch, Pierce, Fenner & Smith
                      Incorporated

  3,150,000

J.P. Morgan Securities Inc. 

  3,150,000

SunTrust Robinson Humphrey, Inc. 

  3,150,000

Wells Fargo Securities, LLC

  2,100,000

BB&T Capital Markets, a division of Scott & Stringfellow, LLC. 

  1,050,000

BMO Capital Markets Corp. 

  2,100,000

Deutsche Bank Securities Inc. 

  2,100,000

Morgan Stanley & Co. Incorporated

  2,100,000

UBS Securities LLC

  2,100,000
     

                      Total

  21,000,000
     

              Subject to the terms and conditions set forth in the purchase agreement, the underwriters have agreed, severally and not jointly, to purchase all of the shares sold under the purchase agreement if any of these shares are purchased. If an underwriter defaults, the purchase agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreement may be terminated.

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

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

Commissions and Discounts

              The representatives have advised us that the underwriters propose initially to offer the shares to the public at the public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $0.38 per share. After the initial offering, the public offering price, concession or any other term of the offering may be changed.

              The following table shows the public offering price, underwriting discount and proceeds before expenses to us. The information assumes either no exercise or full exercise by the underwriters of their overallotment option.

 
  Per Share   Without Option  
With Option
 

Public offering price

  $ 12.75   $ 267,750,000   $ 307,912,500  

Underwriting discount

  $ 0.6375   $ 13,387,500   $ 15,395,625  

Proceeds, before expenses, to us

  $ 12.1125   $ 254,362,500   $ 292,516,875  

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              The expenses of the offering, not including the underwriting discount, are estimated at $0.6 million and are payable by us.

Overallotment Option

              We have granted an option to the underwriters to purchase up to 3,150,000 additional shares at the public offering price, less the underwriting discount. The underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any overallotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the purchase agreement, to purchase a number of additional shares proportionate to that underwriter's initial amount reflected in the above table.

No Sales of Similar Securities

              We have agreed, with exceptions, not to sell or transfer any common stock for 60 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., SunTrust Robinson Humphrey, Inc. and Wells Fargo Securities, LLC.

              Our executive officers and directors and Ares Capital Management and certain of its affiliates have agreed, with exceptions, not to sell or transfer any common stock for 90 days after the date of this prospectus supplement without first obtaining the written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., SunTrust Robinson Humphrey, Inc. and Wells Fargo Securities, LLC. Specifically, we and these other persons have agreed, with certain limited exceptions, including with respect to the issuance of our common stock in connection with the Allied Acquisition, not to directly or indirectly

              This lock-up 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. In the event that either (x) during the last 17 days of the lock-up period referred to above, we issue an earnings release or material news or a material event relating to the Company occurs or (y) prior to the expiration of the lock-up period, we announce that we will release earnings results or become aware that material news or a material event will occur during the 16-day period beginning on the last day of the lock-up period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

Nasdaq Global Select Market Listing

              The shares are listed on the Nasdaq Global Select Market under the symbol "ARCC."

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Price Stabilization, Short Positions

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

              In connection with the offering, the underwriters may purchase and sell our common stock in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. "Covered" short sales are sales made in an amount not greater than the underwriters' overallotment option described above. The underwriters may close out any covered short position by either exercising their overallotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option. "Naked" short sales are sales in excess of the overallotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of shares of common stock made by the underwriters in the open market prior to the completion of the offering.

              Similar to other purchase transactions, the underwriters' purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on the Nasdaq Global Select Market, in the over-the-counter market or otherwise.

              Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

Passive Market Making

              In connection with this offering, underwriters and selling group members may engage in passive market making transactions in the common stock on the Nasdaq Global Select Market in accordance with Rule 103 of Regulation M under the Exchange Act during a period before the commencement of offers or sales of common stock and extending through the completion of distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker's bid, that bid must then be lowered when specified purchase limits are exceeded. Passive market making may cause the price of our common stock to be higher than the price that otherwise would exist in the open market in the absence of those transactions. The underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time.

Electronic Offer, Sale and Distribution of Shares

              The underwriters 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 underwriters, and the

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underwriters may distribute such prospectuses electronically. The underwriters may allocate a limited number of shares for sale to their online brokerage customers.

Other Relationships

              The underwriters and their 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 and other services to Ares and its affiliates and managed funds and Ares Capital or our portfolio companies for which they have received or will be entitled to receive separate fees. In particular, the underwriters or their affiliates may execute transactions with Ares Capital or on behalf of Ares Capital, Ares or any of our or their portfolio companies, affiliates and/or managed funds. In addition, the underwriters or their 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 and its affiliates and managed funds.

              An affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as Allied Capital's financial advisor in connection with the Allied Acquisition.

              Affiliates of the underwriters are limited partners of private investment funds affiliated with our investment adviser, Ares Capital Management LLC.

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

              After the date of this prospectus supplement, the underwriters and their 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 underwriters and their affiliates in the ordinary course of its 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 underwriters or their 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.

              Affiliates of certain of the underwriters serve as lenders under our credit facilities and are also lenders to private investment funds managed by Ivy Hill Asset Management L.P., our portfolio company. Certain of the underwriters and their affiliates were underwriters in connection with our initial public offering and our subsequent common stock offerings and rights offering, for which they received customary fees. J.P. Morgan Securities Inc. acted as Ares Capital's financial advisor in connection with the Allied Acquisition. J.P. Morgan Securities Inc. has also been engaged to help us evaluate other various potential strategic acquisition and investment transactions for which it has received and will continue to receive customary fees and expense reimbursement.

              Proceeds of this offering will be used to repay or repurchase outstanding indebtedness under our senior secured revolving credit agreement with J.P. Morgan Chase Bank, N.A., as Administrative Agent. Affiliates of certain of the underwriters are lenders under this revolving credit facility and, therefore, will receive a portion of the proceeds of this offering.

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Table of Contents

              Frank E. O'Bryan, one of our independent directors and a member of our audit committee is a stockholder of the publicly traded parent company of one of the underwriters of this offering. As a result, Mr. O'Bryan may be considered an "interested person" of the Company during the pendency of this offering under relevant rules of the Investment Company Act of 1940.

              The principal business address of Merrill Lynch, Pierce, Fenner & Smith Incorporated is One Bryant Park, New York, NY 10036. The principal business address of J.P. Morgan Securities Inc. is 383 Madison Avenue, New York, NY 10179. The principal business address of SunTrust Robinson Humphrey, Inc. is 303 Peachtree Street, Atlanta, GA 30308. The principal business address of Wells Fargo Securities, LLC is 375 Park Avenue, New York, New York 10152. The principal business address of BB&T Capital Markets, a division of Scott & Stringfellow, LLC, is 909 E. Main Street, Richmond, Virginia 23219. The principal business address of BMO Capital Markets Corp. is 3 Times Square, New York, NY 10036. The principal business address of Deutsche Bank Securities, Inc., is 60 Wall Street, New York, NY 10005. The principal business address of Morgan Stanley & Co. Incorporated is 1585 Broadway, New York, NY 10036. The principal business address of UBS Securities LLC is 299 Park Avenue, New York, NY 10171.

Notice to Prospective Investors in the EEA

              In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a "Relevant Member State") an offer to the public of any shares which are the subject of the offering contemplated by this prospectus may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any shares may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:

provided that no such offer of shares shall result in a requirement for the publication by us or any representative of a prospectus pursuant to Article 3 of the Prospectus Directive.

              Any person making or intending to make any offer of shares within the EEA should only do so in circumstances in which no obligation arises for us or any of the underwriters to produce a prospectus for such offer. Neither we nor the underwriters have authorized, nor do they authorize, the making of any offer of shares through any financial intermediary, other than offers made by the underwriters which constitute the final offering of shares contemplated in this prospectus.

              For the purposes of this provision, and your representation below, the expression an "offer to the public" in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide to purchase any shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression "Prospectus Directive" means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

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              Each person in a Relevant Member State who receives any communication in respect of, or who acquires any shares under, the offer of shares contemplated by this prospectus will be deemed to have represented, warranted and agreed to and with us and each underwriter that:

              In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are "qualified investors" (as defined in the Prospectus Directive) (i) who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "Order") and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as "relevant persons"). This document must not be acted on or relied on in the United Kingdom by persons who are not relevant persons. In the United Kingdom, any investment or investment activity to which this document relates is only available to, and will be engaged in with, relevant persons.

Notice to Prospective Investors in Switzerland

              This document, as well as any other material relating to the shares which are the subject of the offering contemplated by this prospectus, do not constitute an issue prospectus pursuant to Article 652a and/or 1156 of the Swiss Code of Obligations. The shares will not be listed on the SIX Swiss Exchange and, therefore, the documents relating to the shares, including, but not limited to, this document, do not claim to comply with the disclosure standards of the listing rules of SIX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss Exchange. The shares are being offered in Switzerland by way of a private placement, i.e., to a small number of selected investors only, without any public offer and only to investors who do not purchase the shares with the intention to distribute them to the public. The investors will be individually approached by the issuer from time to time. This document, as well as any other material relating to the shares, is personal and confidential and do not constitute an offer to any other person. This document may only be used by those investors to whom it has been handed out in connection with the offering described herein and may neither directly nor indirectly be distributed or made available to other persons without express consent of the issuer. It may not be used in connection with any other offer and shall in particular not be copied and/or distributed to the public in (or from) Switzerland.

Notice to Prospective Investors in the Dubai International Financial Centre

              This document relates to an exempt offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority. This document is intended for distribution only to persons of a type specified in those rules. It must not be delivered to, or relied on by, any other person. The Dubai Financial Services Authority has no responsibility for reviewing or verifying any documents in connection with exempt offers. The Dubai Financial Services Authority has not approved this document nor taken steps to verify the information set out in it, and has no responsibility for it. The shares which are the subject of the offering contemplated by this prospectus may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this document you should consult an authorised financial adviser.

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LEGAL MATTERS

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

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PROSPECTUS

$1,000,000,000

LOGO

Common Stock
Preferred Stock
Debt Securities
Subscription Rights
Warrants


              Ares Capital Corporation is a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland. We have elected to be regulated as a business development company under the Investment Company Act of 1940. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component. To a lesser extent, we also make equity investments.

              We are externally managed by Ares Capital Management LLC, an affiliate of Ares Management LLC, a global alternative asset manager and a Securities and Exchange Commission ("SEC") registered investment adviser with approximately $33 billion of total committed capital as of December 31, 2009. Ares Operations LLC, an affiliate of Ares Management LLC, provides the administrative services necessary for us to operate.

              Our common stock is traded on The NASDAQ Global Select Market under the symbol "ARCC." On January 22, 2010, the last reported sales price of our common stock on The NASDAQ Global Select Market was $12.77 per share. The net asset value per share of our common stock at September 30, 2009 (the last date prior to the date of this prospectus on which we determined net asset value) was $11.16.

              Investing in our securities involves risks that are described in the "Risk Factors" section beginning on page 26 of this prospectus, including the risk of leverage.

              We may offer, from time to time, in one or more offerings or series, up to $1,000,000,000 of our common stock, preferred stock, debt securities, subscription rights to purchase shares of our common stock or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, separately or as units comprised of any combination of the foregoing, which we refer to, collectively, as the "securities." The preferred stock, debt securities, subscription rights and warrants offered hereby may be convertible or exchangeable into shares of our common stock. The securities may be offered at prices and on terms to be described in one or more supplements to this prospectus. In the event we offer common stock, the offering price per share of our common stock less any underwriting commissions or discounts will generally not be less than the net asset value per share of our common stock at the time we make the offering. However, we may issue shares of our common stock pursuant to this prospectus at a price per share that is less than our net asset value per share (a) in connection with a rights offering to our existing stockholders, (b) with the prior approval of the majority of our common stockholders or (c) under such circumstances as the SEC may permit. This prospectus and the accompanying prospectus supplement concisely provide important information about us that you should know before investing in our securities. Please read this prospectus and the accompanying prospectus supplement before you invest and keep it for future reference. We file annual, quarterly and current reports, proxy statements and other information with the SEC. This information is available free of charge by calling us collect at (310) 201-4200 or on our website at www.arescapitalcorp.com. The SEC also maintains a website at www.sec.gov that contains such information.


              Neither the SEC 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 securities unless accompanied by a prospectus supplement.


The date of this prospectus is January 26, 2010.


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

TABLE OF CONTENTS

 
  Page

Prospectus Summary

  1

The Company

  1

Offerings

  14

Fees and Expenses

  16

Selected Condensed Consolidated Financial Data of Ares Capital

  20

Unaudited Selected Pro Forma Condensed Consolidated Financial Data

  24

Unaudited Pro Forma Per Share Data

  25

Risk Factors

  26

Forward-Looking Statements

  53

Unaudited Pro Forma Condensed Consolidated Financial Statements

  54

Use of Proceeds

  81

Price Range of Common Stock and Distributions

  82

Ratios of Earnings to Fixed Charges

  84

Management's Discussion and Analysis of Financial Condition and Results of Operations

  85

Senior Securities

  112

Business

  113

Pending Allied Acquisition

  130

Portfolio Companies

  132

Management

  140

Certain Relationships and Related Transactions

  160

Control Persons and Principal Stockholders

  162

Determination of Net Asset Value

  163

Dividend Reinvestment Plan

  165

Certain Material U.S. Federal Income Tax Considerations

  167

Description of Securities

  176

Description of Our Capital Stock

  176

Sales of Common Stock Below Net Asset Value

  184

Issuance of Warrants or Securities to Subscribe For or Convertible Into Shares of Our Common Stock

  189

Description of Our Preferred Stock

  190

Description of Our Subscription Rights

  191

Description of Our Warrants

  192

Description of Our Debt Securities

  194

Regulation

  206

Custodian, Transfer and Dividend Paying Agent and Registrar

  212

Brokerage Allocation and Other Practices

  212

Plan of Distribution

  213

Legal Matters

  215

Independent Registered Public Accounting Firm

  215

Available Information

  215

Financial Statements

  F-1

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ABOUT THIS PROSPECTUS

              This prospectus is part of a registration statement that we have filed with the SEC, using the "shelf" registration process. Under the shelf registration process, we may offer, from time to time, up to $1,000,000,000 of our common stock, preferred stock, debt securities, subscription rights to purchase shares of our common stock or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, separately or as units comprised of any combination of the foregoing, on terms to be determined at the time of the offering. The securities 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 securities that we may offer. Each time we use this prospectus to offer securities, 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. As of the date of this registration statement, we had offered $115,069,149 of the $1,000,000,000 of securities covered by this registration statement. Please carefully read this prospectus and the 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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PROSPECTUS SUMMARY

              This summary highlights some of the information contained elsewhere 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 consolidated subsidiaries; "Ares Capital Management" or "investment adviser" refers to Ares Capital Management LLC; "Ares Operations" refers to Ares Operations LLC; and "Ares" refers to Ares Partners Management Company LLC and its affiliated companies (other than portfolio companies of its affiliated funds), including Ares Management LLC, which we also refer to as "Ares Management."

              Other than as specifically set forth herein, information presented with respect to Ares Capital does not reflect the consummation of the Allied Acquisition (as defined below), and any investment decision you make should be made independent of the consummation of the Allied Acquisition. We cannot assure you that the Allied Acquisition will be consummated as scheduled, or at all. See "Pending Allied Acquisition" for a description of the terms of the Allied Acquisition, "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" for a description of the risks associated with a failure to consummate the Allied Acquisition and "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition" for a description of the risks that the combined company may face if the Allied Acquisition is consummated.


THE COMPANY

              Ares Capital, a Maryland corporation, is a specialty finance company that is a closed-end, non-diversified management investment company. We have elected to be regulated as a business development company, or a "BDC," under the Investment Company Act of 1940, or the "Investment Company Act." We were founded on April 16, 2004, were initially funded on June 23, 2004 and completed our initial public offering on October 8, 2004. Ares Capital's investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in U.S. middle-market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive. However, we may from time to time invest in larger companies. In this prospectus, we generally use the term "middle market" to refer to companies with annual EBITDA (earnings before interest, taxes, depreciation and amortization) of between $10 million and $250 million. As discussed in "Recent Developments" below, on October 26, 2009, we entered into a definitive agreement (the "Merger Agreement") under which we have agreed, subject to the satisfaction of certain closing conditions, to acquire Allied Capital Corporation ("Allied Capital") in an all stock transaction, which we refer to as the "Allied Acquisition." The Allied Acquisition will be completed in two parts: first, our wholly owned subsidiary, which we refer to as the "merger subsidiary," will merge with and into Allied Capital and second, Allied Capital will merge with and into Ares Capital, which we refer to as the "subsequent combination." We cannot assure you that the Allied Acquisition will be consummated as scheduled, or at all. See "Pending Allied Acquisition" for a description of the terms of the Allied Acquisition, "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" for a description of the risks associated with a failure to consummate the Allied Acquisition and "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition" for a description of the risks that the combined company may face if the Allied Acquisition is consummated.

              We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component like warrants. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Mezzanine debt is subordinated to senior loans and is generally unsecured. Our debt investments have ranged between $10 million and $100 million each,

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although the investment sizes may be more or less than the targeted range. Our investment sizes are expected to grow with our capital availability and, if completed, upon consummation of the Allied Acquisition. To a lesser extent, we also make equity investments. Each of our equity investments have generally been less than $20 million, but may grow with our capital availability and are usually made in conjunction with loans we make to these portfolio companies.

              The proportion of these investments will change over time given our views on, among other things, the economic and credit environment we are operating in. In connection with our investing activities, we may make commitments with respect to indebtedness or securities of a potential portfolio company substantially in excess of our final investment. In such situations, while we may initially agree to fund up to a certain dollar amount of an investment, we may syndicate a portion of such amount to third parties, such that we make a smaller investment than what was reflected in our original commitment.

              The first and second lien senior loans generally have stated terms of three to 10 years and the mezzanine debt investments generally have stated terms of up to 10 years, but the expected average life of such first and second lien loans and mezzanine debt is generally between three and seven years. However, we may invest in securities with any maturity or duration. The debt that we invest in typically is not initially rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than "Baa3" by Moody's Investors Service or lower than "BBB-" by Standard & Poor's). We may invest without limit in debt of any rating, as well as debt that has not been rated by any nationally recognized statistical rating organization.

              We believe that our investment adviser, Ares Capital Management, 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 has been in existence for more than 12 years and its senior principals have an average of over 20 years experience investing in senior loans, high yield bonds, mezzanine debt and private equity securities. The Company has access to the Ares staff of approximately 110 investment professionals and to over 150 administrative professionals employed by Ares who provide assistance in accounting, legal, compliance, operations, technology and investor relations.

              While our primary focus is to generate current income and capital appreciation through investments in first and second lien senior loans and mezzanine debt and, to a lesser extent, equity securities of eligible portfolio companies, we also may invest up to 30% of our portfolio in opportunistic investments of non-eligible portfolio companies. Specifically, as part of this 30% basket, we may invest in debt of middle-market companies located outside of the United States, in investment funds that are operating pursuant to certain exceptions to the Investment Company Act, in advisers to similar investment funds and in debt and equity of public companies that do not meet the definition of eligible portfolio companies because their market capitalization of publicly traded equity securities exceeds the levels provided for in the Investment Company Act. We expect that these public companies generally will have debt that may be non-investment grade. From time to time we may also invest in high yield bonds, which, depending on the issuer, may or may not be included in the 30% basket.

              In addition to making investments in the Ares Capital portfolio, our portfolio company, Ivy Hill Asset Management, L.P. ("IHAM"), manages three unconsolidated senior debt funds, Ivy Hill Middle Market Credit Fund, Ltd. ("Ivy Hill I"), Ivy Hill Middle Market Credit Fund II, Ltd. ("Ivy Hill II") and Ivy Hill Senior Debt Fund, L.P. and related vehicles ("Ivy Hill SDF" and, together with Ivy Hill I and Ivy Hill II, the "Ivy Hill Funds") and serves as the sub-adviser/sub-manager for four others: CoLTS 2005-1 Ltd., CoLTS 2005-2 Ltd. and CoLTS 2007-1 Ltd., or collectively, the "CoLTS Funds," and FirstLight Financial Corporation, or "FirstLight." As of December 31, 2009, IHAM had total committed capital under management of over $2.3 billion.

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              We and GE Commercial Finance Investment Advisory Services LLC also co-manage an unconsolidated senior debt fund: the Senior Secured Loan Fund LLC (formerly known as the Unitranche Fund LLC), or the "SL Fund."

About Ares

              Founded in 1997, Ares is a global alternative asset manager and SEC registered investment adviser with approximately $33 billion of total committed capital and over 250 employees as of December 31, 2009.

              Ares specializes in originating and managing assets in both the leveraged finance and private equity markets. Ares' leveraged finance activities include the origination, acquisition and management of senior loans, high yield bonds, mezzanine debt and special situation investments. Ares' private equity activities focus on providing flexible, junior capital to middle-market companies. Ares has the ability to invest across a capital structure, from senior floating rate debt to common equity. This flexibility, combined with Ares' "buy and hold" philosophy, enables Ares to structure an investment to meet the specific needs of a company rather than the less flexible demands of the public markets.

              Ares is comprised of the following groups:

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

Ares Capital Management

              Ares Capital Management, our investment adviser, is served by a dedicated origination and transaction development team of approximately 34 investment professionals led by the partners of Ares Capital Management, Michael Arougheti, Eric Beckman, Kipp deVeer, Mitchell Goldstein and Michael Smith. Ares Capital Management leverages off of Ares' entire investment platform and benefits from

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the significant capital markets, trading and research expertise of all of Ares' investment professionals. Ares funds currently hold over 700 investments in over 30 different industries. Ares Capital Management's investment committee has nine members, including the partners of Ares Capital Management and Senior Partners of Ares' Capital Markets Group and Private Equity Group.

MARKET OPPORTUNITY

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

COMPETITIVE ADVANTAGES

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

Existing Investment Platform

              As of December 31, 2009, Ares managed approximately $33 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. Specifically, the Ares platform provides the Company an advantage through its deal flow generation and investment evaluation process. Ares Capital's asset management platform also provides additional market information, company knowledge and industry insight that benefits the investment and due diligence process. Ares'

4



professionals maintain extensive financial sponsor and intermediary relationships, which provide valuable insight and access to transactions and information.

Seasoned Management Team

              Ares' senior professionals have an average of over 20 years of experience in leveraged finance, including substantial experience in investing in leveraged loans, high yield bonds, mezzanine debt, distressed debt and private equity securities. Ares Capital Management's investment professionals and members of its investment committee also have significant experience investing across market cycles. As a result of Ares' extensive investment experience and the history of its seasoned management team, Ares has developed a strong reputation across U.S. and European capital markets. We believe that Ares' long history in the leveraged loan market and the extensive experience of the principals investing across market cycles provides Ares Capital Management with a competitive advantage in identifying, investing in, and managing a portfolio of investments in middle-market companies.

Experience and Focus on Middle-Market Companies

              Ares has historically focused on investments in middle-market companies and we benefit from this experience. In sourcing and analyzing deals, our investment adviser uses Ares' extensive network of relationships with intermediaries focused on middle-market companies to attract well-positioned prospective portfolio company investments. Our investment adviser works closely with the Ares investment professionals, who oversee a portfolio of investments in over 700 companies, and provide access to an extensive network of relationships and special insights into industry trends and the state of the capital markets.

Disciplined Investment Philosophy

              In making its investment decisions, our investment adviser has adopted Ares' long-standing, consistent credit-based investment approach that was developed over 18 years ago by its founders. Specifically, Ares Capital Management's investment philosophy, portfolio construction and portfolio management involve an assessment of the overall macroeconomic environment, financial markets and company-specific research and analysis. Its investment approach emphasizes capital preservation, low volatility and minimization of downside risk.

Extensive Industry Focus

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

Flexible Transaction Structuring

              We are flexible in structuring investments, including the types of securities in which we invest and the terms associated with such investments. The principals of Ares have extensive experience in a wide variety of securities for leveraged companies with a diverse set of terms and conditions. We believe this approach and experience enables our investment adviser to identify attractive investment opportunities throughout the economic cycle and across a company's capital structure so we can make investments consistent with our stated investment objective and preserve principal while seeking appropriate risk adjusted returns. In addition, we have the ability to provide "one stop" financing with

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the ability to invest capital across the balance sheet and hold larger investments than many of our competitors. The ability to underwrite, syndicate and hold larger investments (a) increases flexibility, (b) may increase net fee income and earnings through syndication, (c) broadens market relationships and deal flow and (d) allows us to optimize our portfolio composition. We believe that the ability to provide capital at every level provides a strong value proposition to middle market borrowers and our senior debt capabilities provide superior deal origination and relative value analysis capabilities compared to traditional "mezzanine only" lenders.

Broad Origination Strategy

              Our investment adviser focuses on self-originating most of our investments, by identifying a broad array of investment opportunities across multiple channels. It also leverages off of the extensive relationships of the broader Ares platform, including the relationships with portfolio companies held by funds managed by IHAM, to identify investment opportunities. We believe that this allows for asset selectivity and that there is a significant relationship between proprietary deal origination and credit performance. Our focus on generating proprietary deal flow and lead investing also gives us greater control over capital structure, deal terms, pricing and documentation and results in active portfolio management of investments. Moreover, by leading the investment process, our investment adviser is able to secure controlling positions in credit tranches providing additional control in investment outcomes. Our investment adviser also has originated substantial proprietary deal flow from middle market intermediaries, which often allows us to act as the sole or principal source of institutional junior capital to the borrower.

OPERATING AND REGULATORY STRUCTURE

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

              As a BDC, we are required to comply with certain regulatory requirements. While we are permitted to finance investments using debt, our ability to use debt is limited in certain significant respects. See "Regulation." We have elected to be treated for U.S. 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 "Certain Material U.S. Federal Income Tax Considerations."

MARKET CONDITIONS

              Due to volatility in global markets, the availability of capital and access to capital markets has been limited over the last two years. We responded to recent constraints on raising new capital by pursuing other avenues of liquidity and growth, such as adjusting the pace of our investments, becoming more selective in evaluating investment opportunities, pursuing asset sales, developing our third-party asset management capabilities and/or recycling lower yielding investments. We also intend to continue pursuing opportunities to manage third-party funds. As the global liquidity situation and market conditions evolve, we will continue to monitor and adjust our approach to funding accordingly. However, given the unprecedented nature of the volatility in the global markets, there can be no assurances that these activities will be successful. While levels of market disruption and volatility appear to be improving, there can be no assurance that they will not worsen. If they do, we could face

6



materially higher financing costs. Consequently, our operating strategy could be materially and adversely affected.

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

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

LIQUIDITY

              We are party to the Revolving Credit Facility (as defined herein) that provides for up to $690.0 million of borrowings (comprised of $615.0 million on a stand-alone basis and an additional $75.0 million in commitments contingent upon the closing of the Allied Acquisition) and up to $897.5 million prior to the closing of the Allied Acquisition, or $1.05 billion after the closing of the Allied Acquisition, if we exercise the "accordion" feature, expires on January 22, 2013.

              In addition, our wholly owned subsidiary Ares Capital CP (as defined herein) is party to the CP Funding Facility (as defined herein) that provides for up to $400.0 million of borrowings, and which expires on January 22, 2013 (with two one year extension options, subject to mutual consent). We use the term "Facilities" to refer to the Revolving Credit Facility and the CP Funding Facility. As of January 22, 2010, we had $315.3 million available for borrowing under our Facilities. As of January 22, 2010, we also had outstanding $273.8 million of CLO Notes (as defined herein) that mature on December 20, 2019. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources."

RISK FACTORS

              Investing in Ares Capital involves risks. The following is a summary of certain risks that you should carefully consider before investing in our securities. In addition, see "Risk Factors" beginning on page 25 for a more detailed discussion of the factors you should carefully consider before deciding to invest in our securities.

Risks Relating to Our Business

7


Risks Relating to Our Investments

8


Risks Relating to a Consummation of the Allied Acquisition

9


Risks Relating to Offerings Pursuant to this Prospectus

RECENT DEVELOPMENTS

Allied Acquisition

              On October 26, 2009, we entered into a definitive agreement to acquire Allied Capital in an all stock transaction valued at $862 million, or approximately $4.61 per Allied Capital share as of January 20, 2010. The boards of directors of both companies have each unanimously approved the Allied Acquisition.

              Allied Capital is an internally managed BDC. Allied Capital invests in primarily private middle-market companies in a variety of industries through long-term debt and equity capital instruments.

              While there can be no assurances as to the exact timing, or that the Allied Acquisition will be completed at all, we are working to complete the Allied Acquisition in the first quarter of 2010. The consummation of the Allied Acquisition is subject to certain conditions, including, among others, Allied Capital stockholder approval, Ares Capital stockholder approval, required regulatory approvals

10



(including expiration of the waiting period under the Hart-Scott-Rodino Act Antitrust Improvements Act of 1976, as amended, or the "HSR Act," the early termination of which was granted on December 1, 2009), receipt of certain Ares Capital and Allied Capital lender consents and other customary closing conditions.

              On January 14, 2010, Prospect Capital Corporation ("Prospect Capital") proposed to Allied Capital to acquire all of the issued and outstanding shares of Allied Capital in a stock-for-stock merger. On January 19, 2010, the Board of Directors of Allied Capital unanimously rejected the offer. On January 26, 2010, Prospect Capital renewed its proposal and increased it proposed share exchange ratio from 0.385 Prospect Capital shares for each Allied Capital Share to 0.40 Prospect Capital shares for each Allied Capital Share.

              We cannot assure you that the Allied Acquisition will be consummated as scheduled, or at all (including as a result of any competing offer). See "Pending Allied Acquisition" for a more detailed description of the terms of the Allied Acquisition, "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" for a description of the risks associated with a failure to consummate the Allied Acquisition and "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition" for a description of the risks that the combined company may face if the Allied Acquisition is consummated.

Unitranche Fund Acquisition

              In a separate transaction, on October 30, 2009, we completed our acquisition of Allied Capital's interests in the SL Fund for $165 million in cash. The SL Fund was formed in December 2007 to invest in "unitranche" loans of middle-market companies and has approximately $3.6 billion of committed capital, approximately $900 million in aggregate principal amount of which is currently funded. Of the $2.7 billion of unfunded committed capital, approximately $350 million would be funded by us. Since our acquisition of the SL Fund we have made one investment of $11.6 million. Our investment entitles us to a coupon of LIBOR plus 8.0% and certain other sourcing and management fees. In addition, since we invest in the substantial majority of the subordinated certificates in the SL Fund, our underlying investment also entitles us to a substantial portion of the excess cash flows from the loan portfolio.

Ivy Hill SDF Acquisition

              On December 29, 2009, we made an incremental investment in IHAM to facilitate its acquisition of Allied Capital's management rights in respect of, and interests in, the Allied Capital Senior Debt Fund (now referred to as "Ivy Hill SDF"), for approximately $33 million in cash. Ivy Hill SDF currently has approximately $294 million of committed capital invested primarily in first lien loans and to a lesser extent, second lien loans of middle-market companies. IHAM manages Ivy Hill SDF and receives fee income and potential equity distributions in respect of interests that it acquired in Ivy Hill SDF.

Revolving Credit Facility

              On January 22, 2010, we entered into an agreement to amend and restate our senior secured revolving credit facility (the "Revolving Credit Facility"). The amendment and restatement of the Revolving Credit Facility, among other things, increased the size of the facility from $525 million to $690 million (comprised of $615 million in commitments on a stand-alone basis and an additional $75 million in commitments contingent upon the closing of the Allied Acquisition), extended the maturity date to January 22, 2013 and modified pricing. Subject to certain exceptions, pricing under our prior revolving credit facility was based on LIBOR plus 1.00% or on an "alternate base rate" (which was the highest of a prime rate, the federal funds rate plus 0.50%, or one month LIBOR plus 1.00%). Subject to certain exceptions, pricing under the Revolving Credit Facility is based on LIBOR plus an applicable spread of between 2.50% and 4.00% or on the "alternate base rate" plus an applicable

11



spread of between 1.50% and 3.00%, in each case based on a pricing grid depending on our credit rating. The effective LIBOR spread under the Revolving Credit Facility on January 22, 2010 was 3.00%. The Revolving Credit Facility is secured by substantially all of our assets (subject to certain exceptions, including investments held by certain of our subsidiaries).

              The Revolving Credit Facility includes an "accordion" feature that allows us, under certain circumstances, to increase the size of the Revolving Credit Facility to a maximum of $897.5 million prior to the closing of the Allied Acquisition, and up to a maximum of $1.05 billion upon the closing of the Allied Acquisition.

Amendment to CP Funding Facility

              On January 22, 2010, we combined our existing $225 million amortizing Ares Capital CP Funding LLC facility (the "CP Funding Facility") with our existing $200 million revolving CP Funding II LLC facility (together, the "CP Funding Facilities"), both with Wachovia Bank, National Association, into a single $400 million revolving securitized facility. In connection with the combination, we entered into an Amended and Restated Purchase and Sale Agreement with Ares Capital CP Funding Holdings LLC, our wholly owned subsidiary ("CP Holdings"), pursuant to which we will sell to CP Holdings certain loans that we have originated or acquired, or will originate or acquire (the "Loans") from time to time, which Loans CP Holdings will subsequently sell to Ares Capital CP Funding LLC, a wholly owned subsidiary of CP Holdings ("Ares Capital CP"). The CP Funding Facility is secured by all of the assets held by Ares Capital CP and the membership interest in CP Holdings.

              The combined CP Funding Facility, among other things, extends the maturity date to January 22, 2013 (with two one-year extension options, subject to mutual consent). Subject to certain exceptions, the interest charged on the CP Funding Facility is based on LIBOR plus an applicable spread of between 2.25% and 3.75% or on a "base rate" (which is the higher of a prime rate, or the federal funds rate plus 0.50%) plus an applicable spread of between 1.25% to 2.75%, in each case, based on a pricing grid depending upon our credit rating. The effective LIBOR spread under the CP Funding Facility on January 22, 2010 was 2.75%.

Other Investment Activity

              As of January 15, 2010, we made $381.8 million of investments (including agreements to fund revolving credit facilities or delayed draw loans) since September 30, 2009. Of these investments, approximately 27% were made in first lien senior secured debt, 62% in senior subordinated debt and 11% in equity/other securities. Of these investments, 26% bear interest at floating rates with a weighted average stated rate of LIBOR plus 11% and 65% bear interest at fixed rates with a weighted average stated rate of 16.6%. As of January 15, 2010, we exited $423.9 million of investments since September 30, 2009. Of these investments, approximately 31% were first lien senior secured debt, 18% were second lien senior secured debt, 48% were senior subordinated debt and 3% were equity securities. Of these investments, 43% bear interest at floating rates with a weighted average stated rate of LIBOR plus 7% and 47% bear interest at fixed rates with a weighted average stated rate of 12%.

              In addition, as of January 21, 2010, we had an investment backlog and pipeline of $137.7 million and $214.9 million, respectively. We expect to syndicate a portion of these investments and commitments to third parties. The consummation of any of the investments in this backlog and pipeline depends upon, among other things: satisfactory completion of our due diligence investigation of the prospective portfolio company, our acceptance of the terms and structure of such investment and the execution and delivery of satisfactory transaction documentation. We cannot assure you that we will make any of these investments or that we will syndicate any portion of our investments and commitments.

12


Other Acquisitions

              We believe that the dislocation in the credit markets has created compelling risk adjusted returns in both the primary and secondary markets. Further, the current dislocation and illiquidity in the credit markets has also increased the likelihood of further consolidation in our industry. To that end, over the past 12-18 months we have evaluated (and expect to continue to evaluate in the future) a number of potential strategic acquisition opportunities, including acquisitions of:

              For example, in June 2009 our portfolio company IHAM completed the acquisition of contracts to sub-manage approximately $770 million of middle market loan assets in three CLO vehicles managed by affiliates of Wells Fargo & Company. IHAM also acquired certain equity interests in these three CLOs. On October 26, 2009, we entered into a definitive agreement to acquire Allied Capital in an all stock transaction valued at $648 million, or approximately $3.47 per Allied Capital share as of October 23, 2009. See "—Allied Acquisition." In addition, on October 30, 2009, we completed our acquisition of Allied Capital's interests in the SL Fund for $165 million in cash and on December 29, 2009, we made an incremental investment in IHAM to facilitate its acquisition of Allied Capital's management rights in respect of, and interests in, Ivy Hill SDF for approximately $33 million in cash. See "—Unitranche Fund Acquisition" and "—Ivy Hill SDF Acquisition."

              We have been and continue to be engaged in discussions with counterparties in respect of various potential strategic acquisition and investment transactions, including potential acquisitions of other finance companies. Some of these transactions could be material to our business and, if consummated, could be difficult to integrate, result in increased leverage or dilution and/or subject us to unexpected liabilities. However, none of these discussions has progressed to the point where the consummation of any such transaction could be deemed to be probable or reasonably certain as of the date of this prospectus. Consummation of any such transaction will be subject to completion of due diligence, finalization of key business and financial terms (including price) and negotiation of final definitive documentation as well as a number of other factors and conditions including, without limitation, the approval of our board of directors (after having determined that such transaction is in the best interest of our stockholders), any required third party consents and, in certain cases, the approval of our stockholders. We cannot predict how quickly the terms of any such transaction could be finalized, if at all. Accordingly, there can be no assurance that definitive documentation for any such transaction would be executed or even if executed, that any such transaction will be consummated. In connection with evaluating potential strategic acquisition and investment transactions, we have, and may in the future, incur significant expenses for the evaluation and due diligence investigation of these potential transactions.

OUR CORPORATE INFORMATION

              Our administrative offices are located at 2000 Avenue of the Stars, 12th Floor, 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.

13



OFFERINGS

              We may offer, from time to time, up to $1,000,000,000 of our common stock, preferred stock, debt securities, subscription rights to purchase shares of our common stock or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, or units comprised of any combination of the foregoing, on terms to be determined at the time of the offering. We will offer our securities at prices and on terms to be set forth in one or more supplements to this prospectus. The offering price per share of our common stock, less any underwriting commissions or discounts, generally will not be less than the net asset value per share of our common stock at the time of an offering. However, we may issue shares of our common stock pursuant to this prospectus at a price per share that is less than our net asset value per share (a) in connection with a rights offering to our existing stockholders, (b) with the prior approval of the majority of our common stockholders or (c) under such other circumstances as the SEC may permit. Any such issuance of shares of our common stock below net asset value may be dilutive to the net asset value of our common stock. See "Risk Factors—Risks Relating to Offerings Pursuant to this Prospectus." As of the date of this registration statement, we had offered $115,069,149 of the $1,000,000,000 of securities covered by this registration statement.

              We may offer our securities directly to one or more purchasers, including existing stockholders in a rights offering, through agents that we designate from time to time or to or through underwriters or dealers. The prospectus supplement relating to each offering will identify any agents or underwriters involved in the sale of our securities, 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 securities 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 among other things, (a)  investing in portfolio companies in accordance with our investment objective and strategies and market conditions and (b) repaying indebtedness. Each 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 "Price Range of Common Stock and Distributions."

Taxation

 

We have elected to be treated for U.S. federal income tax purposes as a RIC. As a RIC, we generally will not pay corporate-level U.S. federal income taxes on any income and gain that we distribute to our stockholders as dividends on a timely basis. Among other things, in order to maintain our RIC status, we must meet specified income source and asset diversification requirements and distribute annually generally an amount equal to at least 90% of our investment company taxable income, out of assets legally available for distribution. See "Risk Factors—Risks Relating to Our Business—We may be subject to certain corporate-level taxes regardless of whether we continue to qualify as a RIC" and "Price Range of Common Stock and Distributions."

14


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 cash dividend, then stockholders' 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. Stockholders whose cash dividends are reinvested in additional shares of our common stock will be subject to the same U.S. federal, state and local tax consequences as stockholders who elect to receive their dividends in cash. See "Dividend Reinvestment Plan."

The NASDAQ Global Select
Market symbol

 

"ARCC"

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 Capital Stock."

Leverage

 

We borrow funds to make additional investments. We use this practice, which is known as "leverage," to attempt to increase returns to our common stockholders, but it involves significant risks. See "Risk Factors," "Senior Securities" and "Regulation—Indebtedness and Senior Securities." With certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the Investment Company 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' assessments of market and other factors at the time of any proposed borrowing.

Management arrangements

 

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

Available information

 

We are required to file periodic reports, proxy statements and other information with the SEC. This information is available free of charge by calling us collect at (310) 201-4200 or on our website at www.arescapitalcorp.com. The SEC also maintains a website at www.sec.gov that contains this information.

15



FEES AND EXPENSES

              The following table is intended to assist you in understanding the costs and expenses that an investor in our common stock will bear directly or indirectly, based on the assumptions set forth below. 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 or to be paid by "you," "us," "the Company" or "Ares Capital," or that "we" will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Ares Capital.

Stockholder transaction expenses (as a percentage of offering price):

       

Sales load paid by us

        (1)

Offering expenses borne by us

        (2)

Dividend reinvestment plan expenses

    None     (3)
       

Total stockholder transaction expenses paid by us

        (4)
       

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

       

Management fees

    2.53 %(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)

    2.61 %(7)

Interest payments on borrowed funds

    2.04 %(8)

Other expenses

    1.70 %(9)

Acquired fund fees and expenses

    0.03 %(10)
       

Total annual expenses (estimated)

    8.91 %(11)
       

(1)
In the event that the securities to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load. Purchases of shares of our common stock on the secondary market are not subject to sales charges, but may be subject to brokerage commissions or other charges. The table does not include any sales load (underwriting discount or commission) that stockholders may have paid in connection with their purchase of shares of our common stock.

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

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

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

(5)
"Consolidated net assets attributable to common stock" equals net assets at September 30, 2009.

(6)
Our management fee is currently 1.5% of our total assets other than cash and cash equivalents (which includes assets purchased with borrowed amounts). For the purposes of this table, we have assumed that we maintain no cash or cash equivalents and that the management fee will remain at 1.5% as set forth in our current investment advisory and management agreement. We may from time to time decide it is appropriate to change the terms of the agreement. Under the Investment Company Act, any material change to our investment advisory and management agreement must be submitted to stockholders for approval. The 2.53% reflected on the table is calculated on our net assets (rather than our total assets). See "Management—Investment Advisory and Management Agreement."

16


(7)
This item represents our investment adviser's incentive fees based on annualizing actual amounts earned on our pre-incentive fee net income for the nine months ended September 30, 2009 and assumes that the incentive fees earned for the nine months ended September 30, 2009 will be based on the actual realized capital gains as of September 30, 2009, computed net of realized capital losses and unrealized capital depreciation. It also assumes that this fee will remain constant although it is based on our performance and will not be paid unless we achieve certain goals. We expect to invest or otherwise utilize all of the net proceeds from securities registered under the registration statement of which this prospectus is a part pursuant to a particular prospectus supplement within three months of the date of the offering pursuant to such prospectus supplement and may have capital gains and interest income that could result in the payment of an incentive fee to our investment adviser in the first year after completion of offerings pursuant to this prospectus. Since our inception, the average quarterly incentive fee payable to our investment adviser has been approximately 0.56% of our weighted net assets (2.24% on an annualized basis). For more detailed information about incentive fees previously incurred by us, please see Note 3 to our consolidated financial statements for the period ended September 30, 2009.

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 part, payable annually in arrears, 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 and before taking into account any incentive fees payable during the period) is less than 8.0% of our net assets at the beginning of such period. These calculations will be adjusted for any share issuances or repurchases.

See "Management—Investment Advisory and Management Agreement."

(8)
"Interest payments on borrowed funds" represents an estimate of our annualized interest expenses based on actual interest and credit facility expenses incurred for the nine months ended September 30, 2009. During the nine months ended September 30, 2009, our average borrowings were $865 million and cash paid for interest expense was $15.1 million. We had outstanding borrowings of $767.9 million at September 30, 2009. This item is based on our assumption that our borrowings and interest costs after an offering will remain similar to those prior to such offering. The prospectus supplement related to the offering of any debt securities pursuant to this prospectus will calculate this item based on the effects of our borrowings and interest costs after the issuance of such debt securities. The amount of leverage that we employ at any particular time will depend on, among other things, our board of directors' and our investment adviser's assessment of market and other factors at the time of any proposed borrowing. See "Risk

17


(9)
Includes our overhead expenses, including payments under the administration agreement (as defined herein) based on our allocable portion of overhead and other expenses incurred by Ares Operations in performing its obligations under the administration agreement. Such expenses are estimated based on annualized "Other expenses" for the nine months ended September 30, 2009. See "Management—Administration Agreement." The holders of shares of our common stock (and not the holders of our debt securities or preferred stock, if any) indirectly bear the cost associated with our annual expenses.

(10)
The Company's stockholders indirectly bear the expenses of underlying investment companies in which the Company invests. This amount includes the fees and expenses of investment companies in which the Company is invested as of September 30, 2009. Certain of these investment companies are subject to management fees, which generally range from 1% to 2.5% of total net assets, or incentive fees, which generally range between 15% to 25% of net profits. When applicable, fees and expenses are based on historic fees and expenses for the investment companies. For those investment companies with little or no operating history, fees and expenses are based on expected fees and expenses stated in the investment companies' offering memorandum, private placement memorandum or other similar communication without giving effect to any performance. Future fees and expenses for these investment companies may be substantially higher or lower because certain fees and expenses are based on the performance of the investment companies, which may fluctuate over time. The amount of the Company's average net assets used in calculating this percentage was based on average net assets of $1.1 billion for the nine months ended September 30, 2009.

(11)
"Total annual expenses" as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage and increase our total assets. The SEC requires that the "Total annual expenses" percentage be calculated as a percentage of net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period), rather than the total assets, including assets that have been funded with borrowed monies.

 
  1 year   3 years   5 years   10 years  

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return(1)

  $ 65   $ 191   $ 314   $ 605  

(1)
The above illustration assumes that we will not realize any capital gains computed net of all realized capital losses and unrealized capital depreciation. The expenses you would pay, based on a $1,000 investment and assuming a 5% annual return resulting entirely from net realized capital gains (and therefore subject to the capital gain incentive fee), and otherwise making the same assumptions in the example above, would be: 1 year, $75; 3 years, $220; 5 years, $359; and 10 years, $683. However, cash payment of the capital incentive fee would be deferred if, during the most

18


              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, if our board of directors authorizes and we declare a cash dividend, 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 as actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.

19



SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA OF ARES CAPITAL

              The following selected financial and other data for the years ended December 31, 2008, 2007, 2006 and 2005, and for the period from June 23, 2004 (inception) through December 31, 2004 are derived from our consolidated financial statements, which have been audited by KPMG LLP, an independent registered public accounting firm whose report thereon is included elsewhere in this prospectus. The selected financial and other data for the nine months ended September 30, 2009 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 as of and for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. 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" and "Senior Securities," which are included elsewhere in this prospectus.

20


ARES CAPITAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
As of and For the Nine Months Ended September 30, 2009, As of and For the Years Ended December 31, 2008, 2007, 2006 and 2005 and As of and For the Period June 23, 2004 (inception)
Through December 31, 2004
(dollar amounts in thousands, except per share data and as otherwise indicated)

 
  As of and For
the Nine Months
Ended September 30,
2009
  As of and For
the Year Ended
December 31,
2008
  As of and For
the Year Ended
December 31,
2007
  As of and For
the Year Ended
December 31,
2006
  As of and For
the Year Ended
December 31,
2005
  As of and For
the Period June 23, 2004
(inception)
Through
December 31,
2004
 

Total Investment Income

  $ 176,008   $ 240,461   $ 188,874   $ 120,020   $ 41,851   $ 4,381  

Net Realized and Unrealized Gains (Losses) on Investments, Foreign Currencies and Extinguishment of Debt

    38,009     (266,447 )   (4,117 )   13,064     14,727     475  

Total Expenses

    80,391     113,221     94,751     58,458     14,569     1,666  
                           

Income Tax Expense (Benefit), Including Excise Tax

    563     248     (826 )   4,931     158      
                           

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

  $ 133,063   $ (139,455 ) $ 90,832   $ 69,695   $ 41,851   $ 3,190  
                           

Per Share Data:

                                     
 

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

                                     
 

Basic(1):

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

Diluted(1):

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

Cash Dividend Declared:

  $ 1.12   $ 1.68   $ 1.66   $ 1.64   $ 1.30   $ 0.30  

Total Assets

  $ 2,065,081   $ 2,091,333   $ 1,829,405   $ 1,347,991   $ 613,645   $ 220,456  

Total Debt

  $ 767,871   $ 908,786   $ 681,528   $ 482,000   $ 18,000   $ 55,500  

Total Stockholders' Equity

  $ 1,222,591   $ 1,094,879   $ 1,124,550   $ 789,433   $ 569,612   $ 159,708  

Other Data:

                                     
 

Number of Portfolio Companies at Period End(2)

    94     91     78     60     38     20  
 

Principal Amount of Investments Purchased(3)

    220,141   $ 925,945   $ 1,251,300   $ 1,087,507   $ 504,299   $ 234,102  
 

Principal Amount of Investments Sold and Repayments(4)

    271,786   $ 485,270   $ 718,695   $ 430,021   $ 108,415   $ 52,272  
 

Total Return Based on Market Value(5)

    91.94 %   (45.25 )%   (14.76 )%   29.12 %   (10.60 )%   31.53 %
 

Total Return Based on Net Asset Value(6)

    12.02 %   (11.17 )%   8.98 %   10.73 %   12.04 %   (1.80 )%
 

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

    12.53 %   12.79 %   11.68 %   11.95 %   11.25 %   12.36 %
 

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

    11.70 %   11.73 %   11.64 %   11.63 %   11.40 %   12.25 %

(1)
In accordance with Accounting Standards Codification, or "ASC," 260 (formerly Statement of Financial Accounting Standards No. 128, Earnings Per Share), the weighted average shares of common stock outstanding used in computing basic and diluted earnings per common share have been adjusted retroactively by a factor of 1.02% to recognize the bonus element associated with rights to acquire shares of common stock that we issued to stockholders of record as of March 24, 2008 in connection with a rights offering.

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

21


(3)
The information presented for the period June 23, 2004 (inception) through December 31, 2004 includes $140.8 million of the assets purchased from Royal Bank of Canada and excludes $9.7 million of publicly traded fixed income securities.

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

(5)
Total return based on market value for the nine months ended September 30, 2009 equals the increase of the ending market value at September 30, 2009 of $11.02 per share over the ending market value at December 31, 2008 of $6.33 per share, plus the declared dividends of $1.12 per share for the nine months ended September 30, 2009, divided by the market value at December 31, 2008. Total return based on market value for the year ended December 31, 2008 equals the decrease of the ending market value at December 31, 2008 of $6.33 per share over the ending market value at December 31, 2007 of $14.63 per share, plus the declared dividends of $1.68 per share for the year ended December 31, 2008, divided by the market value at December 31, 2007. Total return based on market value for the year ended December 31, 2007 equals the decrease of the ending market value at December 31, 2007 of $14.63 per share over the ending market value at December 31, 2006 of $19.11 per share, plus the declared dividends of $1.66 per share for the year ended December 31, 2007, divided by the market value at December 31, 2006. Total return based on market value for the year ended December 31, 2006 equals the increase of the ending market value at December 31, 2006 of $19.11 per share over the ending market value at December 31, 2005 of $16.07 per share, plus the declared dividends of $1.64 per share for the year ended December 31, 2006, divided by the market value at December 31, 2005. Total return based on market value for the year ended December 31, 2005 equals the decrease of the ending market value at December 31, 2005 of $16.07 per share over the ending market value at December 31, 2004 of $19.43 per share, plus the declared dividends of $1.30 per share for the year ended December 31, 2005, divided by the market value at December 31, 2004. 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 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.

(6)
Total return based on net asset value for the nine months ended September 30, 2009 equals the change in net asset value during the period (adjusted for share issuances) plus the declared dividends of $1.12 per share for the nine months ended September 30, 2009, divided by the beginning net asset value. Total return based on net asset value for the year ended December 31, 2008 equals the change in net asset value during the period (adjusted for share issuances) plus the declared dividends of $1.68 per share for the year ended December 31, 2008, divided by the beginning net asset value. Total return based on net asset value for the year ended December 31, 2007 equals the change in net asset value during the period (adjusted for share issuances) plus the declared dividends of $1.66 per share for the year ended December 31, 2007, divided by the beginning net asset value. Total return based on net asset value for the year ended December 31, 2006 equals the change in net asset value during the period (adjusted for share issuances) plus the declared dividends of $1.64 per share for the year ended December 31, 2006, divided by the beginning net asset value. Total return based on net asset value for the year ended December 31, 2005 equals the change in net asset value during the period (adjusted for share issuances) plus the declared dividends of $1.30 per share for the year ended December 31, 2005, divided by the beginning net asset value. Total return based on net asset value for the period June 23, 2004 (inception) through December 31, 2004 equals the change in net asset value during the period plus the declared dividend of $0.30 per share (includes return of capital of $0.01 per share) for holders of record on December 27, 2004, divided by the beginning net asset value. Total return based on net asset value is not annualized. The Company's performance changes over time and currently may be different than that shown. Past performance is no guarantee of future results.

(7)
Weighted average yield on debt and income producing equity securities at fair value is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount on accruing debt divided by (b) total income producing equity securities and debt at fair value. Weighted average yield on debt and income producing equity securities at amortized cost is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount on accruing debt divided by (b) total income producing equity securities and debt at amortized cost.

22


SELECTED QUARTERLY DATA (Unaudited)
(dollar amounts in thousands, except per share data)

 
  2009  
 
  Q3   Q2   Q1  

Total Investment Income

  $ 60,881   $ 59,111   $ 56,016  

Net investment income before net realized and unrealized gain (losses) and incentive compensation

  $ 41,133   $ 39,935   $ 37,750  

Incentive compensation

  $ 8,227   $ 7,987   $ 7,550  

Net investment income before net realized and unrealized gain (losses)

  $ 32,906   $ 31,948   $ 30,200  

Net realized and unrealized gains (losses)

  $ 30,370   $ 2,805   $ 4,834  

Net increase (decrease) in stockholders' equity resulting from operations

  $ 63,276   $ 34,753   $ 35,034  

Basic and diluted earnings per common share

  $ 0.62   $ 0.36   $ 0.36  

Net asset value per share as of the end of the quarter

  $ 11.16   $ 11.21   $ 11.20  

 

 
  2008  
 
  Q4   Q3   Q2   Q1  

Total Investment Income

  $ 62,723   $ 62,067   $ 63,464   $ 52,207  

Net investment income before net realized and unrealized gain (losses) and incentive compensation

  $ 40,173   $ 41,025   $ 45,076   $ 32,466  

Incentive compensation

  $ 8,035   $ 8,205   $ 9,015   $ 6,493  

Net investment income before net realized and unrealized gain (losses)

  $ 32,138   $ 32,820   $ 36,061   $ 25,973  

Net realized and unrealized gains (losses)

  $ (142,638 ) $ (74,213 ) $ (32,789 ) $ (16,807 )

Net increase (decrease) in stockholders' equity resulting from operations

  $ (110,500 ) $ (41,393 ) $ 3,272   $ 9,166  

Basic and diluted earnings per common share

  $ (1.14 ) $ (0.43 ) $ 0.04   $ 0.13  

Net asset value per share as of the end of the quarter

  $ 11.27   $ 12.83   $ 13.67   $ 15.17  

 

 
  2007  
 
  Q4   Q3   Q2   Q1  

Total Investment Income

  $ 53,828   $ 47,931   $ 47,399   $ 39,715  

Net investment income before net realized and unrealized gain (losses) and incentive compensation

  $ 33,677   $ 29,875   $ 31,220   $ 23,699  

Incentive compensation

  $ 6,573   $ 5,966   $ 6,229   $ 4,755  

Net investment income before net realized and unrealized gain (losses)

  $ 27,104   $ 23,909   $ 24,991   $ 18,944  

Net realized and unrealized gains (losses)

  $ (16,353 ) $ (984 ) $ 8,576   $ 4,645  

Net increase (decrease) in stockholders' equity resulting from operations

  $ 10,752   $ 22,924   $ 33,567   $ 23,589  

Basic and diluted earnings per common share

  $ 0.15   $ 0.32   $ 0.48   $ 0.44  

Net asset value per share as of the end of the quarter

  $ 15.47   $ 15.74   $ 15.84   $ 15.34  

23



UNAUDITED SELECTED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA

              The following tables set forth unaudited pro forma condensed consolidated financial data for Ares Capital and Allied Capital as a consolidated entity. The information as of September 30, 2009 is presented as if the Allied Acquisition had been completed on September 30, 2009 and after giving effect to certain transactions that occurred subsequent to September 30, 2009. The unaudited pro forma condensed consolidated operating data for the nine months ended September 30, 2009 and for the year ended December 31, 2008 are presented as if the Allied Acquisition had been completed January 1, 2008. In the opinion of management, all adjustments necessary to reflect the effect of these transactions have been made. The Allied Acquisition will be accounted for under the acquisition method of accounting as provided by ASC 805-10 (previously Statement of Financial Accounting Standards, or "SFAS," No. 141(R)), Business Combinations.

              The unaudited pro forma condensed consolidated financial data should be read together with the respective historical audited and unaudited consolidated financial statements and financial statement notes of Allied Capital and Ares Capital in this document. The unaudited pro forma condensed consolidated financial data are presented for comparative purposes only and do not necessarily indicate what the future operating results or financial position of Ares Capital will be following completion of the Allied Acquisition. The unaudited pro forma condensed consolidated financial data does not include adjustments to reflect any cost savings or other operational efficiencies that may be realized as a result of the Allied Acquisition of Allied Capital and Ares Capital or any future merger related restructuring or integration expenses.

              We cannot assure you that the Allied Acquisition will be consummated as scheduled, or at all. See "Pending Allied Acquisition" for a description of the terms of the Allied Acquisition and "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" for a description of the risks associated with a failure to consummate the Allied Acquisition.


(dollar amounts in thousands, except per share data and as otherwise indicated)

 
  For the Nine
Months Ended
September 30,
2009
  For the
Year Ended
December 31,
2008
 

Total Investment Income

  $ 428,258   $ 742,705  

Total Expenses

    281,685     419,671  
           

Net Investment Income Before Income Taxes

    146,573     323,034  
           

Income Tax Expense (Benefit), Including Excise Tax

    4,768     2,754  
           

Net Investment Income

    141,805     320,280  
           

Net Realized and Unrealized Gains (Losses) on Investments, Foreign Currencies and Extinguishment of Debt

    (534,739 )   (1,519,627 )
           

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

  $ (392,934 ) $ (1,199,347 )
           

 

 

As of
September 30,
2009

 

 


 

Total Assets

  $ 4,065,567        

Total Debt

  $ 1,676,393        

Total Stockholders' Equity

  $ 2,236,971        

24



UNAUDITED PRO FORMA PER SHARE DATA

              The following selected unaudited pro forma per share information for the nine months ended September 30, 2009 and for the year ended December 31, 2008 reflects the Allied Acquisition and related transactions as if they had occurred on July 1, 2008. The unaudited pro forma combined net asset value per common share outstanding reflects the Allied Acquisition and related transactions as if they had occurred on September 30, 2009 and certain other transactions that occurred subsequent to September 30, 2009.

              Such unaudited pro forma combined per share information is based on the historical financial statements of Ares Capital and Allied Capital and on publicly available information and certain assumptions and adjustments as discussed in the section entitled "Unaudited Pro Forma Condensed Consolidated Financial Statements." This unaudited pro forma combined per share information is provided for illustrative purposes only and is not necessarily indicative of what the operating results or financial position of Ares Capital or Allied Capital would have been had the Allied Acquisition and related transactions been completed at the beginning of the periods or on the dates indicated, nor are they necessarily indicative of any future operating results or financial position. The following should be read in connection with the section entitled "Unaudited Pro Forma Condensed Consolidated Financial Statements" and other information included in or incorporated by reference into this document.

              We cannot assure you that the Allied Acquisition will be consummated as scheduled, or at all. See "Pending Allied Acquisition" for a description of the terms of the Allied Acquisition and "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" for a description of the risks associated with a failure to consummate the Allied Acquisition.

 
  As of and For the Nine Months Ended
September 30, 2009
  For the Year Ended December 31, 2008  
 
  Ares
Capital
  Allied
Capital
  Pro forma
Combined—
Ares Capital
  Per
Equivalent
Allied Capital
Share(3)
  Ares
Capital
  Allied
Capital
  Pro forma
Combined—
Ares Capital
  Per
Equivalent
Allied Capital
Share(3)
 

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

                                                 

Basic

  $ 1.34   $ (2.89 ) $ (2.50 ) $ (0.81 ) $ (1.56 ) $ (6.01 ) $ (8.11 ) $ (2.63 )

Diluted

  $ 1.34   $ (2.89 ) $ (2.50 ) $ (0.81 ) $ (1.56 ) $ (6.01 ) $ (8.11 ) $ (2.63 )

Cash Dividends Declared(1)

 
$

1.12
 
$

 
$

1.12
 
$

0.36
 
$

1.68
 
$

2.60
 
$

1.68
 
$

0.55
 

Net Asset Value per Share(2)

  $ 11.16   $ 6.70   $ 13.32   $ 4.33   $ 11.27   $ 9.62              

(1)
The cash dividends declared per share represent the actual dividends declared per share for the period presented. The pro forma combined dividends declared is the dividends per share as declared by Ares Capital.

(2)
The pro forma combined net asset value per share is computed by dividing the pro forma combined net assets as of September 30, 2009 by the pro forma combined number of shares outstanding.

(3)
The Allied Capital equivalent pro forma per share amount is calculated by multiplying the combined pro forma share amounts by the common stock exchange ratio of 0.325.

25



RISK FACTORS

              Before you invest in our securities, 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 including our consolidated financial statements and the related notes thereto, before you decide whether to make an investment in our securities. The risks set out below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the net asset value of our common stock and the trading price of our securities could decline, and you may lose all or part of your investment.

RISKS RELATING TO OUR BUSINESS

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

              Beginning in 2007, the U.S. capital markets entered into a period of disruption as evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of the U.S. federal government, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. While these conditions appear to be improving, they could continue for a prolonged period of time or worsen in the future. While these conditions persist, we and other companies in the financial services sector may have to access, if available, alternative markets for debt and equity capital in order to grow. Equity capital may be difficult to raise because, subject to some limited exceptions, as a BDC, we are generally not able to issue additional shares of our common stock at a price less than net asset value without first obtaining approval for such issuance from our stockholders and our independent directors. At our 2009 annual stockholders meeting, subject to certain determinations required to be made by our board of directors, our stockholders approved our ability to sell or otherwise issue shares of our common stock, not exceeding 25% of our outstanding common stock at the time of such issuance, at a price below its then current net asset value per share during a period beginning on May 4, 2009 and expiring on the earlier of the anniversary of the date of the 2009 annual stockholders meeting and the date of the our 2010 annual stockholders meeting, which is expected to be held in May 2010. In addition, our ability to incur indebtedness (including by issuing preferred stock) is limited by applicable regulations such that our asset coverage, as defined in the Investment Company Act, must equal at least 200% immediately after each time we incur indebtedness. The debt capital that will be available, if at all, may be at a higher cost and on less favorable terms and conditions in the future. Any inability to raise capital could have a negative effect on our business, financial condition and results of operations.

              Moreover, recent market conditions have made, and may in the future make, it difficult to extend the maturity of or refinance our existing indebtedness and any failure to do so could have a material adverse effect on our business. The illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our investments.

              Capital markets volatility also affects our investment valuations. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on

26



holding an investment through its maturity). As a result, volatility in the capital markets can adversely affect our valuations.

              Given the recent extreme volatility and dislocation in the capital markets, many BDCs have faced, and may in the future face, a challenging environment in which to raise capital. As a result of the recent significant changes in the capital markets affecting our ability to raise capital, the pace of our investment activity has slowed. In addition, significant changes in the capital markets, including the recent extreme volatility and disruption, has had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on our business, financial condition or results of operations.

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

              If we fail to maintain our status as a BDC, we might be regulated as a closed-end investment company under the Investment Company Act, which would subject us to additional regulatory restrictions and significantly decrease our operating flexibility. In addition, any such failure could cause an event of default under our outstanding indebtedness, which could have a material adverse effect on our business, financial condition or results of operations.

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

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

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

              Accomplishing this result on a cost-effective basis is largely a function of Ares Capital Management's structuring of the investment process and its ability to provide competent, attentive and efficient services to us. Our executive officers and the members of Ares Capital Management's investment committee have substantial responsibilities in connection with their roles at Ares and with the other Ares funds, as well as responsibilities under the investment advisory and management agreement. They may also be called upon to provide significant managerial assistance to certain of 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

27



effectively could have a material adverse effect on our business, financial condition and results of operations.

              In addition, as we grow, we may open up new offices in new geographic regions that may increase our direct operating expenses without corresponding revenue growth.

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

              We will need to periodically access the capital markets to raise cash to fund new investments. Ares has elected to be treated as a RIC and operates in a manner so as to qualify for the U.S. federal income tax treatment applicable to RICs. Among other things, in order to maintain our RIC status, we must distribute to our stockholders on a timely basis generally an amount equal to at least 90% of our investment company taxable income, and, as a result, such distributions will not be available to fund investment originations. We must continue to borrow from financial institutions and issue additional securities to fund our growth. Unfavorable economic or capital market conditions may increase our funding costs, limit our access to the capital markets or could result in a decision by lenders not to extend credit to us. An inability to successfully access the capital markets could limit our ability to grow our business and fully execute our business strategy and could decrease our earnings, if any.

              In addition, with certain limited exceptions, we are only allowed to borrow amounts or issue debt securities or preferred stock such that our asset coverage, as defined in the Investment Company Act, equals at least 200% immediately after such borrowing, which, in certain circumstances, may restrict our ability to borrow or issue debt securities or preferred stock. The amount of leverage that we employ will depend on our investment adviser's and our board of directors' assessments of market and other factors at the time of any proposed borrowing or issuance of debt securities or preferred stock. We cannot assure you that we will be able to maintain our current Facilities or obtain other lines of credit at all or on terms acceptable to us.

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

              We may issue debt securities or preferred stock, which we refer to collectively as "senior securities," or borrow money from banks or other financial institutions, up to the maximum amount permitted by the Investment Company Act. Under the provisions of the Investment Company Act, we are permitted, as a BDC, to incur indebtedness or issue senior securities only in amounts such that our asset coverage, as defined in the Investment Company Act, equals at least 200% after each such incurrence or issuance. If the value of our assets declines, we may be unable to satisfy this test, which may prohibit us from paying dividends and could prevent us from maintaining our status as a RIC or may prohibit us from repurchasing shares of our common stock. If we cannot satisfy this test, we may be required to sell a portion of our investments at a time when such sales may be disadvantageous and, depending on the nature of our leverage, repay a portion of our indebtedness. As of September 30, 2009, our asset coverage for senior securities was 259%.

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

28


              At our 2009 annual stockholders meeting, subject to the board of directors determination described above, our stockholders approved our ability to sell or otherwise issue shares of our common stock, not exceeding 25% of our outstanding common stock at the time of such issuance, at a price below its then current net asset value per share during a period beginning on May 4, 2009 and expiring on the earlier of the anniversary of the date of the 2009 annual stockholders meeting and the date of our 2010 annual stockholders meeting, which is expected to be held in May 2010.

              To generate cash for funding new investments, we have also securitized, and may in the future seek to securitize, our loans. To securitize loans, we may create a separate, wholly owned subsidiary and contribute or sell a pool of loans to such subsidiary (or one of its subsidiaries). Such subsidiary may then sell equity, issue debt or sell interests in the pool of loans, on a limited-recourse basis, the payments on which are generally limited to the pool of loans and the proceeds therefrom. We may also retain a portion of the equity interests in the securitized pool of loans. Any retained equity would be exposed to losses on the related pool of loans before any of the related debt securities. An inability to successfully securitize our loan portfolio could limit our ability to grow our business and fully execute our business strategy. The securitization market is subject to changing market conditions (including the recent, unprecedented dislocation of the securitization and finance markets generally) and we may not be able to access this market when we would otherwise deem appropriate. Moreover, the successful securitization of our loan portfolio might expose us to losses as the residual loans in which we do not sell interests may be those that are riskier and more apt to generate losses. The Investment Company Act may also impose restrictions on the structure of any securitization.

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

              As of September 30, 2009, we had $494.1 million of outstanding borrowings under our Facilities and $273.8 million of CLO Notes (as defined herein). In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our September 30, 2009 total assets of at least 1.21%. The weighted average interest rate charged on our borrowings as of September 30, 2009 was 2.02%. We intend to continue borrowing under the Facilities in the future and we may increase the size of the Facilities or issue debt securities or other evidences of indebtedness (although there can be no assurance that we will be successful in doing so). Our ability to service our debt depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. The amount of leverage that we employ at any particular time will depend on our investment adviser's and our board of directors' assessments of market and other factors at the time of any proposed borrowing.

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

              Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. We currently borrow under our Facilities, and in the future, may borrow from or issue debt securities to banks, insurance companies and other lenders. Holders of such debt securities have fixed dollar claims on our consolidated assets that are superior to the claims of our common stockholders or any preferred stockholders. If the value of our consolidated assets increases, then leveraging would cause the net asset value per share of our common stock to increase more sharply than it would have had we not leveraged.

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              Conversely, if the value of our consolidated assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our consolidated income in excess of consolidated interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our consolidated income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. There can be no assurance that a leveraging strategy will be successful.

              The following table illustrates the effect on return to a holder of our common stock of the leverage created by our use of borrowing at the interest rate of 2.02% and assumes (a) our total value of net assets as of September 30, 2009; (b) $767.9 million debt outstanding as of September 30, 2009 and (c) hypothetical annual returns on our portfolio of minus 15 to plus 15 percent.

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

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

Corresponding Return to Common Stockholders(2)

    -27 %   -18 %   -10 %   -1 %   7 %   16 %   24 %

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

(2)
In order to compute the "Corresponding Return to Common Stockholders," the "Assumed Return on Portfolio" is multiplied by the total value of our assets at September 30, 2009 to obtain an assumed return to us. From this amount, the interest expense calculated by multiplying the interest rate of 2.02% times the $767.9 million debt is subtracted to determine the return available to stockholders. The return available to stockholders is then divided by the total value of our net assets as of September 30, 2009 to determine the "Corresponding Return to Common Stockholders."

In addition to regulatory requirements that restrict our ability to raise capital, the Facilities and the CLO Notes contain various covenants which, if not complied with, could accelerate repayment under the Facilities and the CLO Notes, thereby materially and adversely affecting our liquidity, financial condition and results of operations.

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

              As of the date of this prospectus, we are in compliance with the covenants of the Facilities and the CLO Notes. However, our continued compliance with these covenants depends on many factors, some of which are beyond our control. For example, depending on the condition of the public debt and equity markets and pricing levels, net unrealized depreciation in our portfolio may increase in the future. Any such increase could result in our inability to comply with our obligation to restrict the level of indebtedness that we are able to incur in relation to the value of our assets or to maintain a minimum level of stockholders' equity.

              Accordingly, although we believe we will continue to be in compliance, there are no assurances that we will continue to comply with the covenants in the Facilities and the CLO Notes. Failure to comply with these covenants would result in a default under the Revolving Credit Facility, the CP Funding Facility or the CLO Notes, which, if we were unable to obtain a waiver from the lenders

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under the Revolving Credit Facility, the purchasers under the CP Funding Facility, or the trustee or holders of the CLO Notes, respectively, could accelerate repayment under the Revolving Credit Facility, the CP Funding Facility or the CLO Notes, respectively, and thereby have a material adverse impact on our business, financial condition and results of operations.

We operate in a highly competitive market for investment opportunities.

              A number of entities compete with us to make the types of investments that we make in middle-market companies. We compete with other BDCs, public and private funds, commercial and investment banks, commercial financing companies, insurance companies, high yield investors, hedge funds, and, to the extent they provide an alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the Investment Company Act imposes on us as a BDC and that the Code imposes on us as a RIC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to pursue attractive investment opportunities from time to time.

              We do not seek to compete primarily based on the interest rates we offer and we believe that some of our competitors may make loans with interest rates that are comparable to or lower than the rates we offer. Rather, we compete with our competitors based on our existing investment platform, seasoned management team, experience and focus on middle-market companies, disciplined investment philosophy, extensive industry focus and flexible transaction structuring. For a more detailed discussion of these competitive advantages, see "Business—Competitive Advantages."

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

We may be subject to certain corporate-level taxes regardless of whether we continue to qualify as a RIC.

              We have elected to be treated as a RIC under Subchapter M of the Code and operate in a manner so as to qualify for the U.S. federal income tax treatment applicable to RICs. As a RIC, we generally will not pay corporate-level U.S. federal income taxes on our income and gain that we distribute to our stockholders as dividends on a timely basis. To qualify as a RIC under the Code, we must meet certain income source, asset diversification and annual distribution requirements. We may also be subject to certain U.S. federal excise taxes, as well as state, local and foreign taxes.

              The annual distribution requirement for a RIC is satisfied if we distribute to our stockholders on a timely basis generally an amount equal to at least 90% of our investment company taxable income for each year. Because we use debt financing, we are subject to certain asset coverage ratio requirements under the Investment Company Act and financial covenants under our indebtedness that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. If we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate-level income tax. In that event, the resulting corporate-level taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of

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our distributions. Because we must make distributions to our stockholders as described above, such amounts, to the extent a stockholder is not participating in our dividend reinvestment plan, will not be available to fund investment originations. We will be subject to corporate-level U.S. federal income tax on any undistributed income and/or gain.

              To qualify as a RIC, we must also meet certain annual income source requirements at the end of each taxable year and asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to (a) dispose of certain investments quickly or (b) raise additional capital to prevent the loss of RIC status. Because most of our investments are in private companies and are generally illiquid, any such dispositions may be at disadvantageous prices and may result in losses. Also, the rules applicable to our qualification as a RIC under the Code are complex with many areas of uncertainty. Accordingly, no assurance can be given that we have qualified or will qualify as a RIC. If we fail to qualify as a RIC for any reason and become subject to regular "C" corporation 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. See "Certain Material U.S. Federal Income Tax Considerations—Taxation as a RIC."

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

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

              Since, in certain cases, we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the U.S. federal income tax requirement to distribute generally an amount equal to at least 90% of our investment company taxable income 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 additional corporate-level taxes. See "Certain Material U.S. Federal Income Tax Considerations—Taxation as a RIC."

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

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

              Because preferred stock is another form of leverage and the dividends on any preferred stock we issue must be cumulative, preferred stock has the same risks to our common stockholders as borrowings. Payment of such dividends and repayment of the liquidation preference of such preferred stock must take preference over any dividends or other payments to our common stockholders, and

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preferred stockholders are not subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference.

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

              General interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on our investment objective and rate of return on invested capital. Because we borrow money and may issue debt securities or preferred stock to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on such debt securities or preferred stock and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed-rate securities that have longer maturities. We have entered into certain hedging transactions, such as interest rate swap agreements, to mitigate our exposure to adverse fluctuations in interest rates, and we may continue to do so in the future. However, we cannot assure you that such transactions will be successful in mitigating our exposure to credit risk. Hedging transactions may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio investments. Although we have no policy governing the maturities of our investments, under current market conditions we expect that we will invest in a portfolio of debt generally having maturities of up to 10 years. This means that we are subject to greater risk (other things being equal) than a fund invested solely in shorter-term securities. A decline in the prices of the debt we own could adversely affect the trading price of our shares. Also, an increase in interest rates available to investors could make investment in our common stock less attractive if we are not able to increase our dividend rate, which could reduce the value of our common stock.

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

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

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

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

We may experience fluctuations in our quarterly results.

              We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rates payable on the debt investments we make, the default rates on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses and the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

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

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

              Although other Ares funds generally have different primary investment objectives than Ares Capital, they may from time to time invest in asset classes similar to those targeted by Ares Capital. In addition, Ares is not restricted from raising an investment fund with investment objectives similar to that of Ares Capital. Any such funds may also, from time to time, invest in asset classes similar to those targeted by Ares Capital. Ares Capital Management endeavors to allocate investment opportunities in a fair and equitable manner, and in any event consistent with any fiduciary duties owed to Ares Capital. Nevertheless, it is possible that we may not be given the opportunity to participate in certain investments made by investment funds managed by investment managers affiliated with Ares Capital Management. In addition, there may be conflicts in the allocation of investment opportunities among us and the funds managed by us or one or more of our controlled affiliates, including IHAM, or among the funds they manage. We may or may not participate in investments made by funds managed by us or one or more of our controlled affiliates.

              We have from time to time sold assets to certain funds managed by IHAM and, as part of our investment strategy, we may offer to sell additional assets to funds managed by us and/or one or more of our controlled affiliates or we may purchase assets from funds managed by us and/or one or more of our controlled affiliates. In addition, funds managed by us or one or more of our controlled affiliates may offer assets to or may purchase assets from one another. While assets may be sold or purchased at prices that are consistent with those that could be obtained from third parties in the marketplace, and

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although these types of transactions generally require approval of one or more independent parties, there is an inherent conflict of interest in such transactions between us and funds managed by us or one of our controlled affiliates.

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

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

              The part of the incentive fee payable by us that relates to our pre-incentive fee net investment income is computed and paid on income that may include interest that is accrued but not yet received in cash. If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible.

              Our investment adviser, Ares Capital Management, also has financial interests in the Allied Acquisition that are different from, and/or in addition to, the interests of our stockholders. For example, Ares Capital Management's management fee is based on a percentage of Ares Capital's total assets. Because total assets under management will increase as a result of the Allied Acquisition, the dollar amount of Ares Capital Management's management fee will increase as a result of the Allied Acquisition. In addition, the incentive fee payable by us to Ares Capital Management may be positively impacted as a result of the Allied Acquisition. See "Unaudited Pro Forma Condensed Consolidated Financial Statements."

              Our investment advisory and management agreement renews for successive annual periods if approved by our board of directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not "interested persons" of the Company as defined in Section 2(a)(19) of the Investment Company Act. However, both we and Ares Capital Management have the right to terminate the agreement without penalty upon 60 days' written notice to the other party. Moreover, conflicts of interest may arise if our investment adviser seeks to change the terms of our investment advisory and management agreement, including, for example, the terms for compensation. While any material change to the investment advisory and management agreement must be submitted to stockholders for approval under the Investment Company Act, we may from time to time decide it is appropriate to seek stockholder approval to change the terms of the agreement.

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

              Our portfolio company, IHAM, is party to a services agreement, referred to herein as the "services agreement," with Ares Capital Management, pursuant to which Ares Capital Management provides IHAM with the facilities, investment advisory services and administrative services necessary for the operations of IHAM. IHAM reimburses Ares Capital Management for the costs associated with such services, including Ares Capital Management's allocable portion of overhead and the cost of its officers and respective staff in performing its obligations under the services agreement.

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              We rent office space directly from a third party pursuant to a lease that expires on February 27, 2011. In addition, we have entered into a sublease with Ares Management whereby Ares Management subleases approximately 25% of the office space for a fixed rent equal to 25% of the basic annual rent payable by us under this lease, plus certain additional costs and expenses.

              As a result of the arrangements described above, there may be times when the management team of Ares Management has interests that differ from those of our stockholders, giving rise to a conflict.

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

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

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

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

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

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

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

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

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

              Our primary focus in making investments differs from those of other private funds that are or have been managed by Ares' investment professionals. Further, investors in Ares Capital are not acquiring an interest in other Ares managed funds. Accordingly, we cannot assure you that Ares Capital will replicate Ares' historical success, and we caution you that our investment returns could be substantially lower than the returns achieved by those private funds.

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

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

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We may fail to consummate the Allied Acquisition.

              While there can be no assurances as to the exact timing, or that the Allied Acquisition will be completed at all, we are working to complete the Allied Acquisition in the first quarter of 2010. The consummation of the Allied Acquisition is subject to certain conditions, including, among others, Allied Capital stockholder approval, our stockholder approval, required regulatory approvals (including expiration of the waiting period under the HSR Act, the early termination of which was granted on December 1, 2009), receipt of certain of our and Allied Capital's lender consents and other customary closing conditions. We intend to consummate the Allied Acquisition as soon as possible; however, we cannot assure you that the conditions required to consummate the Allied Acquisition will be satisfied or waived on the anticipated schedule, or at all. If the Allied Acquisition is not completed, we will have incurred substantial expenses for which no ultimate benefit will have been received. See "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition—If the Allied Acquisition does not close, we won't benefit from the expenses incurred in its pursuit." In addition, the Merger Agreement provides for the payment by us to Allied Capital of a reverse termination fee of $30 million under certain circumstances ($30 million if Ares Capital stockholders do not approve the issuance of shares of Ares Capital common stock in the merger). See "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition—Under certain circumstances, we and Allied Capital are obligated to pay each other a termination fee upon termination of the Merger Agreement." See "Pending Allied Acquisition" for a description of the terms of the Allied Acquisition and "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition" for a description of the risks that the combined company may face if the Allied Acquisition is consummated. Any investment decision you make should be made independent of the consummation of the Allied Acquisition.

RISKS RELATING TO OUR INVESTMENTS

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

              As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by or under the direction of our board of directors. We may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company's debt and equity), the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company's securities to publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation. Decreases in the market values or fair values of our investments are recorded as unrealized depreciation. Unprecedented declines in prices and liquidity in the corporate debt markets resulted in significant net unrealized depreciation in our portfolio in the recent past. The effect of all of these factors on our portfolio has reduced our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer additional unrealized losses in future periods, which could have a material adverse impact on our business, financial condition and results of operations.

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

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

              Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods. Therefore, our non-performing assets may increase and the value of our portfolio may decrease during these periods if we are required to write down the values of our investments. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.

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

Investments in privately held middle-market companies involve significant risks.

              We primarily invest in privately held U.S. middle-market companies. Investments in privately held middle-market companies involve a number of significant risks, including the following:

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

              The debt that we invest in is typically not initially rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than "Baa3" by Moody's Investors Service or lower than "BBB-" by Standard & Poor's). Indebtedness of below investment grade quality is regarded as having predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. Our mezzanine investments may result in an above average amount of risk and volatility or loss of principal. We also invest in assets other than mezzanine investments, including first and second lien loans, high-yield securities, U.S. government securities, credit derivatives and other structured securities and certain direct equity investments. These investments will entail additional risks that could adversely affect our investment returns. In addition, to the extent interest payments associated with such debt are deferred, such debt will be subject to greater fluctuations in value based on changes in interest rates. Also, such debt could subject us to phantom income, and since we generally do not receive any cash prior to maturity of the debt, the investment is of greater risk.

Investments in equity securities involve a substantial degree of risk.

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

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

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              Additionally, when we invest in first and second lien senior loans or mezzanine debt, we may acquire warrants or other equity securities as well. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.

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

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

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

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

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

              The rights we may have with respect to the collateral securing any junior priority loans we make to our portfolio companies may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that senior obligations are outstanding, we may forfeit certain rights with respect to the collateral to the holders of the senior obligations. These rights may include the right to

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commence enforcement proceedings against the collateral, the right to control the conduct of such enforcement proceedings, the right to approve amendments to collateral documents, the right to release liens on the collateral and the right to waive past defaults under collateral documents. We may not have the ability to control or direct such actions, even if as a result our rights as junior lenders are adversely affected.

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

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

Our portfolio companies may be highly leveraged.

              Some of our portfolio companies may be highly leveraged, which may have adverse consequences to these companies and to us as an investor. These companies may be subject to restrictive financial and operating covenants and the leverage may impair these companies' ability to finance their future operations and capital needs. As a result, these companies' flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be limited. Further, a leveraged company's income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.

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

              The incentive fee payable by us to Ares Capital Management may create an incentive for Ares Capital Management to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to our investment adviser is determined, which is calculated as a percentage of the return on invested capital, may encourage our investment adviser to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our common stock, including investors in offerings of common stock, securities convertible into our common stock or warrants representing rights to purchase our common stock or securities convertible into our common stock pursuant to this prospectus. In addition, the investment adviser will receive the incentive fee based, in part, upon net capital gains realized on our investments. Unlike the portion of the incentive fee based on income, there is no hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, the investment adviser may have a tendency to invest more in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns. The part of the incentive fee payable by us that relates to our pre-incentive fee net investment income will be computed and paid on income that may include interest that is accrued but not yet received in cash. If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible. The investment adviser is not under any obligation to reimburse us for any part of the incentive fee it received that was based on such accrued interest that we never actually receive.

              Because of the structure of the incentive fee, it is possible that we may have to pay an incentive fee in a quarter where we incur a loss. For example, if we receive pre-incentive fee net

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

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

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

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

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

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

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We may initially invest a portion of the net proceeds of offerings pursuant to this prospectus primarily in high-quality short-term investments, which will generate lower rates of return than those expected from the interest generated on first and second lien loans and mezzanine debt.

              We may initially invest a portion of the net proceeds of offerings primarily in cash, cash equivalents, U.S. government securities and other high-quality short-term investments. These securities may earn yields substantially lower than the income that we anticipate receiving once we are fully invested in accordance with our investment objective. As a result, we may not be able to achieve our investment objective and/or pay any dividends during this period or, if we are able to do so, such dividends may be substantially lower than the dividends that we expect to pay when our portfolio is fully invested. If we do not realize yields in excess of our expenses, we may incur operating losses and the market price of our shares may decline.

RISKS RELATING TO A CONSUMMATION OF THE ALLIED ACQUISITION

Consummation of the Allied Acquisition will cause immediate dilution to our stockholders' voting interests in us and may cause immediate dilution to the net asset value per share of our common stock.

              Upon consummation of the Allied Acquisition, each of Allied Capital's common shares issued and outstanding immediately prior to the effective time of the Allied Acquisition will be converted into and become exchangeable for 0.325 of our common shares, subject to the payment of cash instead of fractional shares. If the Allied Acquisition is consummated, based on the number of our common shares issued and outstanding on the date hereof and assuming that holders of all "in-the-money" Allied Capital stock options elect to be cashed out, our stockholders will own approximately 65% of the combined company's outstanding common stock and Allied Capital stockholders will own approximately 35% of the combined company's outstanding common stock. Consequently, our stockholders should expect to exercise less influence over the management and policies of the combined company following the Allied Acquisition than they currently exercise over our management and policies.

              The exchange ratio of 0.325 of a share of our common stock for each share of Allied Capital common stock was fixed on October 26, 2009, the date of the signing of the Merger Agreement, and is not subject to adjustment based on changes in the trading price of our or Allied Capital common stock before the closing of the Allied Acquisition. Any change in the market price of our common stock prior to completion of the Allied Acquisition will affect the market value of the Allied Acquisition consideration that Allied Capital common stockholders will receive upon completion of the Allied Acquisition. It is possible that the conversion of Allied Capital common shares into our common shares may result in the issuance of our common shares at a price below our net asset value per share at the time of such conversion, which would result in dilution to the net asset value per share of our common stock. For a description of the impact of such an issuance, see "Risk Factors—Risks Relating to Offerings Pursuant to this Prospectus—The net asset value per share of our common stock may be diluted if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock or securities to subscribe for or convertible into shares of our common stock."

              We cannot assure you that the Allied Acquisition will be consummated as scheduled, or at all. See "Pending Allied Acquisition" for a description of the terms of the Allied Acquisition and "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" for a description of the risks associated with a failure to consummate the Allied Acquisition."

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We may be unable to realize the benefits anticipated by the Allied Acquisition, including estimated cost savings and synergies, or it may take longer than anticipated to achieve such benefits.

              The realization of certain benefits anticipated as a result of the Allied Acquisition will depend in part on the integration of Allied Capital's investment portfolio with our investment portfolio and the integration of Allied Capital's investment portfolio or business with our business. There can be no assurance that Allied Capital's business can be operated profitably or integrated successfully into our operations in a timely fashion, or at all. The dedication of management resources to such integration may detract attention from our day-to-day business and there can be no assurance that there will not be substantial costs associated with the transition process or there will not be other material adverse effects as a result of these integration efforts. Such effects, including, but not limited to, incurring unexpected costs or delays in connection with such integration and failure of Allied Capital's investment portfolio to perform as expected, could have a material adverse effect on our financial results.

              We also expect to achieve certain cost savings and synergies from the Allied Acquisition when the two companies have fully integrated their portfolios. It is possible that our estimates of the potential cost savings and synergies could turn out to be incorrect. Allied Capital had significantly higher average borrowings and cash paid for interest expense for the nine months ended September 30, 2009. Assuming such debt remained outstanding, the combined company's annual expenses as a percentage of consolidated net assets attributable to common stock is estimated to increase for Ares Capital stockholders on a pro forma combined basis. In addition, the cost savings and synergies estimates also assume our ability to pay down or refinance certain portions of Allied Capital's debt and to combine our investment portfolio and business with Allied Capital's investment portfolio and business in a manner that permits those cost savings and synergies to be fully realized. If the estimates turn out to be incorrect or we are not able to successfully refinance or pay down Allied Capital's debt and combine the investment portfolios and businesses of the two companies, the anticipated cost savings and synergies may not be fully realized, or realized at all, or may take longer to realize than expected.

Our inability to obtain rating agency confirmation and the third party consents of financing providers to us and Allied Capital necessary to complete the transaction could delay or prevent the completion of the Allied Acquisition.

              Our obligation to complete the Allied Acquisition is subject to the prior receipt of all approvals and consents required to be obtained from applicable agents, lenders, noteholders and other parties with respect to (1) the CLO Notes and (2) Allied Capital's private notes and bank facility. If the Merger Agreement is terminated because the Allied Acquisition has not occurred by June 30, 2010 by reason of the fact that such consents have not been obtained and all of our other closing conditions have been satisfied, then we will be required to pay Allied Capital a reverse termination fee of $30 million.

              We currently intend to (1) seek rating agency confirmation with respect to the CLO Notes, (2) refinance or seek consents in respect of the Allied Acquisition with respect to Allied Capital's private notes, (3) assume Allied Capital's public notes pursuant to a supplemental indenture satisfactory to the trustee thereof and (4) retire Allied Capital's bank facility.

              Although we expect to obtain in a timely manner the confirmations, consents and approvals necessary to complete the pending Allied Acquisition and/or to engage in certain refinancing transactions in connection therewith, if we are unable to timely obtain such confirmations, consents, approvals or refinancings, the closing of the Allied Acquisition could be significantly delayed or the Allied Acquisition may not occur at all.

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The Allied Acquisition or subsequent combination may trigger certain "change of control" provisions and other restrictions in certain of our and Allied Capital's contracts and the failure to obtain any required consents or waivers could adversely impact the combined company.

              Certain agreements of Allied Capital and Ares Capital or their controlled affiliates, including with respect to certain managed funds of Allied Capital and its affiliates, will or may require the consent of one or more counterparties in connection with the Allied Acquisition or subsequent combination. The failure to obtain any such consent may permit such counter-parties to terminate, or otherwise increase their rights or our or Allied Capital's obligations under, any such agreement because the Allied Acquisition may violate an anti-assignment, change of control or similar provision. If this happens, we may have to seek to replace that agreement with a new agreement or seek a waiver or amendment to such agreement. We cannot assure you that we will be able to replace, amend or obtain a waiver under any such agreement on comparable terms or at all.

              If any such agreement is material, the failure to obtain consents, amendments or waivers under, or to replace on similar terms or at all, any of these agreements could adversely affect the financial performance or results of operations of the combined company following the Allied Acquisition and subsequent combination, including preventing us from operating a material part of Allied Capital's business.

              In addition, the consummation of the Allied Acquisition and subsequent combination may violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event that, with or without notice or lapse of time or both, would constitute a default) under, or result in the termination, cancellation, acceleration or other change of any right or obligation (including any payment obligation) under our or Allied Capital's agreements. Any such violation, conflict, breach, loss, default or other effect could, either individually or in the aggregate, have a material adverse effect on the financial condition, results of operations, assets or business of the combined company following completion of the Allied Acquisition and subsequent combination.

Several lawsuits have been filed against Allied Capital, members of Allied Capital's board of directors, us and the merger subsidiary challenging the Allied Acquisition. An adverse ruling in any such lawsuit may prevent the Allied Acquisition from becoming effective within the expected timeframe, or at all. If the Allied Acquisition is consummated, these lawsuits and other legal proceedings could have a material impact on the results of operations, cash flows or financial condition of the combined company.

              We and Allied Capital are aware that a number of lawsuits have been filed by stockholders of Allied Capital challenging the Allied Acquisition. The suits are filed either as putative stockholder class actions, shareholder derivative actions or both. All of the actions assert similar claims against the members of Allied Capital's board of directors alleging that the Merger Agreement is the product of a flawed sales process and that Allied Capital's directors breached their fiduciary duties by agreeing to a structure that was not designed to maximize the value of Allied Capital's stockholders and by failing to adequately value and obtain fair consideration for Allied Capital's shares. They also claim that we (and, in several cases, the merger subsidiary, and, in several other cases, Allied Capital) aided and abetted the directors' alleged breaches of fiduciary duties. All of the actions demand, among other things, a preliminary and permanent injunction enjoining the Allied Acquisition and rescinding the transaction or any part thereof that may be implemented. Such legal proceedings could delay or prevent the transaction from becoming effective within the agreed upon timeframe, or at all, and, if the Allied Acquisition is consummated, may be material to the results of operations, cash flows or financial condition of the combined company.

              Allied Capital is also involved in various other legal proceedings. In addition, Allied Capital's portfolio company, Ciena, is the subject of ongoing governmental investigations, audits and reviews being conducted by the Small Business Administration, the United States Secret Service, the

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U.S. Department of Agriculture and the U.S. Department of Justice. Neither we nor Allied Capital can predict the eventual outcome of these investigations, audits and reviews or other legal proceedings and the ultimate outcome of such matters could, upon consummation of the Allied Acquisition, be material to the results of operations, cash flows or financial condition of the combined company. It is possible that third parties could try to seek to impose liability against the combined company in connection with these matters.

If the Allied Acquisition does not close, we won't benefit from the expenses incurred in its pursuit.

              The Allied Acquisition may not be completed. If the Allied Acquisition is not completed, we will have incurred substantial expenses for which no ultimate benefit will have been received. We have incurred out-of-pocket expenses in connection with the Allied Acquisition for investment banking, legal and accounting fees and financial printing and other related charges, much of which will be incurred even if the Allied Acquisition is not completed.

Termination of the Merger Agreement could negatively impact us.

              If the Merger Agreement is terminated, there may be various consequences, including:

Under certain circumstances, we and Allied Capital are obligated to pay each other a termination fee upon termination of the Merger Agreement.

              No assurance can be given that the Allied Acquisition will be completed. The Merger Agreement provides for the payment by Allied Capital to us of a termination fee of $30 million if the Allied Acquisition is terminated by Allied Capital or us under certain circumstances ($15 million if Allied Capital stockholders do not approve the Allied Acquisition and the Merger Agreement). In addition, the Merger Agreement provides for a payment by us to Allied Capital of a reverse termination fee of $30 million under certain other circumstances. See "Pending Allied Acquisition" for a description of the terms of the Allied Acquisition.

The market price of our common stock after the Allied Acquisition may be affected by factors different from those affecting our common stock currently.

              Our business differs from that of Allied Capital in some respects and, accordingly, the results of operations of the combined company and the market price of our shares of common stock after the Allied Acquisition may be affected by factors different from those currently affecting our results of operations prior to the consummation of the Allied Acquisition.

RISKS RELATING TO OFFERINGS PURSUANT TO THIS PROSPECTUS

Our shares of common stock have recently traded at a discount from net asset value and may do so again in the future, which could limit our ability to raise additional equity capital.

              Shares of closed-end investment companies frequently trade at a market price that is less than the net asset value that is attributable to those shares. This characteristic of closed-end investment

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

There is a risk that investors in our equity securities may not receive dividends or that our dividends may not grow over time and that investors in our debt securities may not receive all of the interest income to which they are entitled.

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

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

              The above referenced distribution requirement may also inhibit our ability to make required interest payments to holders of our debt securities, which may cause a default under the terms of our debt securities. Such a default could materially increase our cost of raising capital, as well as cause us to incur penalties under the terms of our debt securities.

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

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

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

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provisions of our charter and bylaws, may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders.

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

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

The market price of our common stock may fluctuate significantly.

              The capital and credit markets have experienced a period of extreme volatility and disruption that began in 2007. The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:

              In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought against that company. If our stock price fluctuates significantly, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources from our business.

The net asset value per share of our common stock may be diluted if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock or securities to subscribe for or convertible into shares of our common stock.

              At our 2009 Annual Stockholders Meeting, our stockholders approved two proposals designed to allow us to access the capital markets in ways that we would otherwise be unable to as a result of restrictions that, absent stockholder approval, apply to BDCs under the Investment Company Act. Specifically, our stockholders have authorized us to sell or otherwise issue (a) shares of our common stock below its then current net asset value per share in one or more offerings subject to certain

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limitations (including, without limitation, that the number of shares issuable does not exceed 25% of our then outstanding common stock) and (b) warrants or securities to subscribe for or convertible into shares of our common stock subject to certain limitations (including, without limitation, that the number of shares issuable does not exceed 25% of our then outstanding common stock and that the exercise or conversion price thereof is not, at the date of issuance, less than the greater of the market value per share and the net asset value per share of our common stock). Any decision to sell shares of our common stock below its then current net asset value per share or securities to subscribe for or convertible into shares of our common stock would be subject to the determination by our board of directors that such issuance is in our and our stockholders' best interests.

              If we were to sell shares of our common stock below its then current net asset value per share, such sales would result in an immediate dilution to the net asset value per share of our common stock. This dilution would occur as a result of the sale of shares at a price below the then current net asset value per share of our common stock and a proportionately greater decrease in the stockholders' interest in our earnings and assets and their voting interest in us than the increase in our assets resulting from such issuance. Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted.

              In addition, if we issue warrants or securities to subscribe for or convertible into shares of our common stock, subject to certain limitations, the exercise or conversion price per share could be less than net asset value per share at the time of exercise or conversion (including through the operation of anti-dilution protections). Because we would incur expenses in connection with any issuance of such securities, such issuance could result in a dilution of the net asset value per share at the time of exercise or conversion. This dilution would include reduction in net asset value per share as a result of the proportionately greater decrease in the stockholders' interest in our earnings and assets and their voting interest than the increase in our assets resulting from such issuance.

              Further, if current stockholders of the Company do not purchase any shares to maintain their percentage interest, regardless of whether such offering is above or below the then current net asset value per share, their voting power will be diluted. For additional information and hypothetical examples of these risks, see "Sales of Common Stock Below Net Asset Value" and the prospectus supplement pursuant to which such sale is made.

              In addition, our common stock will suffer immediate dilution of their voting power if the Allied Acquisition is consummated. See "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition—Consummation of the Allied Acquisition will cause immediate dilution to our stockholders' voting interests in us and may cause immediate dilution to the net asset value per share of our common stock."

Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than our net asset value per share, then you will experience an immediate dilution of the aggregate net asset value of your shares.

              In the event we issue subscription rights, stockholders who do not fully exercise their subscription rights should expect that they will, at the completion of a rights offering pursuant to this prospectus, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights. We cannot state precisely the amount of any such dilution in share ownership because we do not know at this time what proportion of the shares will be purchased as a result of such rights offering.

              In addition, if the subscription price is less than the net asset value per share of our common stock, then our stockholders would experience an immediate dilution of the aggregate net asset value of their shares as a result of the offering. The amount of any decrease in net asset value is not predictable because it is not known at this time what the subscription price and net asset value per share will be on

50



the expiration date of a rights offering or what proportion of the shares will be purchased as a result of such rights offering. Such dilution could be substantial. See "Risk Factors—Risks Relating to Offerings Pursuant to this Prospectus—The net asset value per share of our common stock and our stockholders' voting interests in us may be diluted if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock or securities to subscribe for or convertible into shares of our common stock" and "Sales of Common Stock Below Net Asset Value."

Investors in offerings of our common stock will likely incur immediate dilution upon the closing of such offering.

              We generally expect the public offering price of any offering of shares of our common stock to be higher than the book value per share of our outstanding common stock (unless we offer shares pursuant to a rights offering or after obtaining prior approval for such issuance from our stockholders and our independent directors). Accordingly, investors purchasing shares of common stock in offerings pursuant to this prospectus may pay a price per share that exceeds the tangible book value per share after such offering.

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

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

You may receive shares of our common stock as dividends, which could result in adverse tax consequences to you.

              In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a portion of such dividend is paid in cash (which portion can be as low as 10% for our taxable years ending on or before December 31, 2011) and certain requirements are met, the entire distribution would be treated as a dividend for U.S. federal income tax purposes. As a result, a stockholder would be taxed on 100% of the dividend in the same manner as a cash dividend, even though most of the dividend was paid in shares of our common stock.

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

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

The trading market or market value of our publicly issued debt securities may fluctuate.

              Upon issuance, our publicly issued debt securities will not have an established trading market. We cannot assure you that a trading market for our publicly issued debt securities will ever develop or be maintained if developed. In addition to our creditworthiness, many factors may materially adversely affect the trading market for, and market value of, our publicly issued debt securities. These factors include, but are not limited to, the following:

51


              You should also be aware that there may be a limited number of buyers when you decide to sell your debt securities. This too may materially adversely affect the market value of the debt securities or the trading market for the debt securities.

Terms relating to redemption may materially adversely affect your return on any debt securities that we may issue.

              If your debt securities are redeemable at our option, we may choose to redeem your debt securities at times when prevailing interest rates are lower than the interest rate paid on your debt securities. In addition, if your debt securities are subject to mandatory redemption, we may be required to redeem your debt securities also at times when prevailing interest rates are lower than the interest rate paid on your debt securities. In this circumstance, you may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as your debt securities being redeemed.

Our credit ratings may not reflect all risks of an investment in our debt securities.

              Our credit ratings are an assessment by third parties of our ability to pay our obligations. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of our debt securities. Our credit ratings, however, may not reflect the potential impact of risks related to market conditions generally or other factors discussed above on the market value of or trading market for the publicly issued debt securities.

52



FORWARD-LOOKING STATEMENTS

              Some of the statements in this 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 involve a number of risks and uncertainties, including statements concerning:

              We use words such as "anticipates," "believes," "expects," "intends," "will," "should," "may" and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and condition could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in "Risk Factors" and elsewhere in this prospectus.

              The forward-looking statements included in this prospectus have been based on information available to us on the date of this 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.

              The forward-looking statements in this prospectus are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Exchange Act.

53



UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

              The Merger Agreement provides that the holders of Allied Capital common stock will be entitled to receive 0.325 shares of our common stock for each share of Allied Capital common stock held by them immediately prior to the effective time. This is estimated to result in approximately 58.3 million shares of our common stock being issued in connection with the Allied Acquisition (assuming that holders of all "in-the-money" Allied Capital stock options elect to be cashed out). The unaudited pro forma condensed consolidated financial information has been derived from and should be read in conjunction with the historical consolidated financial statements and the related notes of both us and Allied Capital, which are included elsewhere in this document. See "Index to Financial Statements."

              The following unaudited pro forma condensed consolidated financial information and explanatory notes illustrate the effect of the Allied Acquisition on our financial position and results of operations based upon the companies' respective historical financial positions and results of operations under the acquisition method of accounting with us treated as the acquirer.

              In accordance with GAAP, the assets and liabilities of Allied Capital will be recorded by us at their estimated fair values as of the date the Allied Acquisition is completed. The unaudited pro forma condensed consolidated financial information of us and Allied Capital reflects the unaudited pro forma condensed consolidated balance sheet as of September 30, 2009 and the unaudited pro forma condensed consolidated income statements for the nine months ended September 30, 2009 and the year ended December 31, 2008. The unaudited pro forma condensed consolidated balance sheet as of September 30, 2009 assumes the Allied Acquisition took place on that date. The unaudited pro forma condensed consolidated statements of income for the nine months ended September 30, 2009 and the year ended December 31, 2008 assumes the Allied Acquisition took place on January 1, 2008. The unaudited pro forma condensed consolidated balance sheet also reflects the impact of certain transactions that occurred subsequent to September 30, 2009.

              The unaudited pro forma condensed consolidated financial information is presented for illustrative purposes only and does not indicate the results of operations or the combined financial position that would have resulted had the Allied Acquisition and subsequent combination been completed at the beginning of the applicable period presented, nor the impact of expense efficiencies, asset dispositions, share repurchases and other factors. In addition, as explained in more detail in the accompanying notes to the unaudited pro forma condensed consolidated financial information, the allocation of the pro forma purchase price reflected in the unaudited pro forma condensed consolidated financial information involves estimates, is subject to adjustment and may vary significantly from the actual purchase price allocation that will be recorded upon completion of the Allied Acquisition.

              We cannot assure you that the Allied Acquisition will be consummated as scheduled, or at all. See "Pending Allied Acquisition" for a description of the terms of the Allied Acquisition and "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" for a description of the risks associated with a failure to consummate the Allied Acquisition.

54



Ares Capital Corporation and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet
As of September 30, 2009
Unaudited
(in thousands, except share and per share data)

 
  Actual Ares
Capital
  Adjusted Allied
Capital(A)*
  Pro Forma
Adjustments*
  Pro Forma
Ares Capital
Combined
 

Assets and Liabilities Data:

                         

Investments

  $ 1,967,724   $ 2,151,838   $ (258,326 )(B) $ 3,861,236  

Cash and cash equivalents

    61,469     356,651     (52,137 )(C)   45,204  

                (320,779 )(B)      

Other assets

    35,888     153,113     (29,874 )(B)   159,127  
                   
 

Total assets

  $ 2,065,081   $ 2,661,602   $ (661,116 ) $ 4,065,567  
                   

Debt

  $ 767,871   $ 1,425,953   $ (229,283 )(B) $ 1,676,393  

                (288,148 )(B)      

Other liabilities

    74,619     45,084     32,500   (B)   152,203  
                   
 

Total liabilities

    842,490     1,471,037     (484,931 )   1,828,596  

Stockholders' equity

   
1,222,591
   
1,190,565
   
(258,326

)(B)
 
2,236,971
 

                (52,137 )(C)      

                (49,738 )(B)      

                (15,393 )(B)      

                (29,874 )(B)      

                229,283   (B)      
                   
 

Total liabilities and stockholders' equity

  $ 2,065,081   $ 2,661,602   $ (661,116 ) $ 4,065,567  
                   

Total shares outstanding

    109,592,728     179,361,775     58,292,577     167,885,305  
                   

Net assets per share

  $ 11.16   $ 6.64   $ (4.43 ) $ 13.32  
                   

*
Please see Note 3 of the accompanying notes to pro forma condensed consolidated financial statements on page 75.

See accompanying notes to pro forma condensed consolidated financial statements.

55



Ares Capital Corporation and Subsidiaries
Pro Forma Condensed Consolidated Statement of Operations
For the Nine Months Ended September 30, 2009
Unaudited
(in thousands, except share and per share data)

 
  Actual Ares
Capital
  Actual Allied
Capital
  Pro Forma
Adjustments*
  Pro Forma
Ares Capital
Combined
 

Performance Data:

                         

Interest and dividend income

  $ 166,842   $ 230,017   $   (D) $ 396,859  

Fees and other income

    9,166     22,233         31,399  
                   
 

Total investment income

    176,008     252,250         428,258  

Interest and credit facility fees

   
18,603
   
129,023
   

  (E)
 
147,626
 

Base management fees

    22,502         33,756   (F)   56,258  

Incentive management fees

    23,764           (G)   23,764  

Other expenses

    15,522     63,690     (25,175 )(H)   54,037  
                   
 

Total expenses

    80,391     192,713     8,581     281,685  
                   

Net investment income before taxes

    95,617     59,537     (8,581 )   146,573  
                   

Income taxes

    563     4,205         4,768  
                   

Net investment income

    95,054     55,332     (8,581 )   141,805  
                   

Net realized gains (losses)

    (4,232 )   (158,255 )       (162,487 )

Net unrealized gains (losses)

    15,698     (380,528 )       (364,830 )
                   

Net realized and unrealized gains (losses)

    11,466     (538,783 )       (527,317 )

Gain on extinguishment of debt

   
26,543
   
83,532
   
   
110,075
 

Loss on extinguishment of debt

        (117,497 )       (117,497 )
                   

Net increase (decrease) in stockholders' equity

  $ 133,063   $ (517,416 ) $ (8,581 ) $ (392,934 )
                   

Weighted average shares outstanding

    99,066,652     178,814,954     58,292,577   (I)   157,359,229  
                   

Earnings (loss) per share

  $ 1.34   $ (2.89 ) $ (0.15 ) $ (2.50 )
                   

*
Please see Note 3 of the accompanying notes to pro forma condensed consolidated financial statements on page 75.

See accompanying notes to pro forma condensed consolidated financial statements.

56



Ares Capital Corporation and Subsidiaries
Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 2008
Unaudited
(in thousands, except share and per share data)

 
  Actual Ares
Capital
  Actual Allied
Capital
  Pro Forma
Adjustments*
  Pro Forma
Ares Capital
Combined
 

Performance Data:

                         

Interest and dividend income

  $ 212,675   $ 457,418   $   (D) $ 670,093  

Fees and other income

    27,786     44,826         72,612  
                   
 

Total investment income

    240,461     502,244         742,705  

Interest and credit facility fees

   
36,515
   
148,930
   

  (E)
 
185,445
 

Base management fees

    30,463         68,777   (F)   99,240  

Incentive management fees

    31,748         16,358   (G)   48,106  

Other expenses

    14,495     137,634     (65,249 )(H)   86,880  
                   
 

Total expenses

    113,221     286,564     19,886     419,671  
                   

Net investment income before taxes

    127,240     215,680     (19,886 )   323,034  
                   

Income taxes

    248     2,506         2,754  
                   

Net investment income

    126,992     213,174     (19,886 )   320,280  
                   

Net realized gains (losses)

    6,371     (129,418 )       (123,047 )

Net unrealized gains (losses)

    (272,818 )   (1,123,762 )       (1,396,580 )
                   

Net realized and unrealized gains (losses)

    (266,447 )   (1,253,180 )       (1,519,627 )

Gain on extinguishment of debt

   
   
   
   
 

Loss on extinguishment of debt

                 
                   

Net increase (decrease) in stockholders' equity

  $ (139,455 ) $ (1,040,006 ) $ (19,886 ) $ (1,199,347 )
                   

Weighted average shares outstanding

    89,666,243     172,996,114     58,292,577   (I)   147,958,820  
                   

Earnings (loss) per share

  $ (1.56 ) $ (6.01 ) $ (0.34 ) $ (8.11 )
                   

*
Please see Note 3 of the accompanying notes to pro forma condensed consolidated financial statements on page 75.

See accompanying notes to pro forma condensed consolidated financial statements.

57



Ares Capital Corporation and Subsidiaries

Pro Forma Schedule of Investments
Unaudited
As of September 30, 2009
(Dollar Amounts in Thousands)

 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Financial                                              
AGILE Fund I, LLC(4)   Investment company   Member interest               $ 665   $ 417   $ 665   $ 417  
                                                
AllBridge Financial, LLC(4)   Investment company   Senior secured loan (6.6%, due 12/09)                 1,311     1,311     1,311     1,311  
        Common equity                 40,118     15,523     40,118     15,523  
                                                
Allied Capital Senior Debt Fund, L.P.(4)(6)   Investment partnership   Limited partnership interest                 31,800     33,044     31,800     33,044  
                                                
BB&T Capital Partners/Windsor Mezzanine Fund, LLC(5)   Investment company   Member interest                 11,789     10,009     11,789     10,009  
                                                
Calder Capital Partners, LLC(4)   Investment company   Senior secured loan (12.5%, due 5/09)(3)                 4,496     1,100     4,496     1,100  
        Member interest                 2,453         2,453      
                                                
Callidus Capital Corporation(4)   Investment company   Senior subordinated note (18.0%, due 8/13)(2)                 20,939     15,165     20,939     15,165  
        Common stock (100 shares)                              
                                                
Callidus Debt Partners CDO Fund I, Ltd.   Investment company   Class C notes (12.9%, due 12/13)(3)                 19,527     2,935     19,527     2,935  
        Class D notes (17.0%, due 12/13)(3)                 9,454         9,454      
                                                
Callidus Debt Partners CLO Fund III, Ltd.   Investment company   Preferred stock (23,600,000 shares)                 20,138     2,199     20,138     2,199  
                                                
Callidus Debt Partners CLO Fund IV, Ltd.   Investment company   Class D notes (5.1%, due 4/20)                 2,160     1,653     2,160     1,653  
        Income notes (0.0%)                 14,868     4,366     14,868     4,366  
                                                
Callidus Debt Partners CLO Fund V, Ltd.   Investment company   Income notes (2.6%)                 13,521     4,625     13,521     4,625  
                                                
Callidus Debt Partners CLO Fund VI, Ltd.   Investment company   Class D notes (6.5%, due 10/21)                 7,602     3,833     7,602     3,833  
        Income notes (0.0%)                 29,144     4,155     29,144     4,155  
                                                
Callidus Debt Partners CLO Fund VII, Ltd.   Investment company   Income notes (0.0%)                 24,824     5,431     24,824     5,431  
                                                
Callidus MAPS CLO Fund I LLC   Investment company   Class E notes (5.8%, due 12/17)                 17,000     11,400     17,000     11,400  
        Income notes (0.0%)                 41,176     13,662     41,176     13,662  
                                                
Callidus MAPS CLO Fund II, Ltd.   Investment company   Class D notes (4.8%, due 7/22)                 3,785     3,068     3,785     3,068  
        Income notes (0.9%)                 18,109     4,819     18,109     4,819  
                                                
Carador PLC(5)   Investment company   Ordinary shares (7,110,525 shares)   $ 9,033   $ 2,311                 9,033     2,311  
                                                
Catterton Partners VI, L.P.   Investment partnership   Limited partnership interest                 3,287     1,789     3,287     1,789  
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

58


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
CIC Flex, LP   Investment partnership   Limited partnership units (0.69 units)     41     41                 41     41  
                                                
Ciena Capital LLC(4)   Investment banking services   Senior secured loan (5.5%, due 3/09)(3)                 319,031     102,232     319,031     102,232  
        Class B equity interest                 119,436         119,436      
        Class C equity interest                 109,097         109,097      
                                                
Commercial Credit Group, Inc.   Commercial equipment finance and leasing company   Senior subordinated note (15.0%, due 6/15)                 21,970     21,970     21,970     21,970  
        Preferred stock (64,679 shares)                 15,543     6,212     15,543     6,212  
        Warrants                              
                                                
Cortec Group Fund IV, L.P.   Investment partnership   Limited partnership interest                 6,572     3,812     6,572     3,812  
                                                
Covestia Capital Partners, LP   Investment partnership   Limited partnership units     1,059     1,059                 1,059     1,059  
                                                
Direct Capital Corporation(4)   Commercial equipment finance and leasing company   Senior secured loan (8.0%, due 1/14)(3)                 8,175     8,573     8,175     8,573  
        Senior subordinated note (16.0%, due 3/13)(3)                 55,496     7,139     55,496     7,139  
        Common stock (2,317,020 shares)                 25,732         25,732      
                                                
Dryden XVIII Leveraged Loan 2007 Limited   Investment company   Class B notes (5.0%, due 10/19)(3)                 7,872     2,355     7,872     2,355  
        Income notes (0.0%)                 23,164     2,415     23,164     2,415  
                                                
Dynamic India Fund IV   Investment company   Common equity                 9,350     7,982     9,350     7,982  
                                                
eCentury Capital Partners, L.P.   Investment partnership   Limited partnership interest                 7,274         7,274      
                                                
Fidus Mezzanine Capital, L.P.   Investment partnership   Limited partnership interest                 12,828     7,804     12,828     7,804  
                                                
Financial Pacific Company(4)   Commercial equipment finance and leasing company   Senior subordinated loan (17.0%, due 2/12)(2)                 58,861     41,417     58,861     41,417  
        Junior subordinated loan (20.0% due 8/12)(2)                 10,009         10,009      
        Preferred stock (9,458 shares)                 8,865         8,865      
        Common stock (12,711 shares)                 12,783         12,783      
                                                
Firstlight Financial Corporation(5)   Investment company   Senior subordinated note (1.0%, due 12/16)(2)     72,871     54,670                 72,871     54,670  
        Common stock (40,000 shares)     40,000                     40,000      
                                                
Ivy Hill Asset Management, L.P.(4)   Investment partnership   Member interest     3,586     11,088                 3,586     11,088  
                                                
Ivy Hill Middle Market Credit Fund, Ltd.(4)   Investment company   Class B deferrable interest notes (6.7%, due 11/18)     40,000     36,800                 40,000     36,800  
        Subordinated notes (due 11/18)     15,681     14,113                 15,681     14,113  
                                                
Imperial Capital Group, LLC and Imperial Capital Private Opportunities, LP(5)   Investment banking services   Limited partnership interest     3,094     3,094                 3,094     3,094  
        Common units (10,551 units)     15,000     20,003                 15,000     20,003  
                                                
Knightsbridge CLO 2007-1 Ltd.(4)   Investment company   Class E notes (9.5%, due 1/22)                 18,700     11,160     18,700     11,160  
        Income notes (13.3%)                 38,746     22,640     38,746     22,640  
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

59


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Knightsbridge CLO 2008-1 Ltd.(4)   Investment company   Class C notes (7.8%, due 6/18)                 12,800     12,246     12,800     12,246  
        Class D notes (8.8%, due 6/18)                 8,000     7,080     8,000     7,080  
        Class E notes (5.3%, due 6/18)                 11,081     9,798     11,081     9,798  
        Income notes (21.2%)                 21,327     20,112     21,327     20,112  
                                                
Kodiak Fund LP   Investment partnership   Limited partnership interest                 9,332     900     9,332     900  
                                                
Novak Biddle Venture Partners III, L.P.   Investment partnership   Limited partnership interest                 2,018     1,037     2,018     1,037  
                                                
Pangaea CLO 2007-1 Ltd.   Investment company   Class D notes (5.3%, due 1/21)                 11,985     7,795     11,985     7,795  
                                                
Partnership Capital Growth Fund I, LP   Investment partnership   Limited partnership interest     2,711     2,711                 2,711     2,711  
                                                
SPP Mezzanine Funding II, L.P.   Investment partnership   Limited partnership interest                 7,605     6,987     7,605     6,987  
                                                
Senior Secured Loan Fund LLC(4)(6)   Private debt fund   Subordinated certificates (8.4%)                 165,248     165,000     165,248     165,000  
        Member interest                 1         1      
                                                
Trivergence Capital Partners, LP   Investment partnership   Limited partnership interest     1,672     1,672                 1,672     1,672  
                                                
VSC Investors LLC   Investment company   Member interest     635     635                 635     635  
                                                
Webster Capital II, L.P.   Investment partnership   Limited partnership interest                 1,338     809     1,338     809  
                                   
  Total             205,383     148,197     1,478,405     617,979     1,683,788     766,176  
                                   
                                                
Business Services                                              
BenefitMall Holdings, Inc.   Employee benefits broker services company   Senior subordinated note (18.0%, due 6/14)(2)                 40,250     40,250     40,250     40,250  
        Common stock (39,274,290 shares)                 39,274     73,729     39,274     73,729  
        Warrants                              
                                                
Booz Allen Hamilton, Inc.   Strategy and technology consulting services   Senior secured loan (7.5%, due 7/15)     728     743                 728     743  
        Senior subordinated loan (13.0%, due 7/16)(2)     22,416     22,650                 22,416     22,650  
                                                
CitiPostal Inc.(4)   Document storage and management services   Senior secured revolving loan (3.7%, due 12/13)                 683     683     683     683  
        Senior secured loan (12.0%, due 12/13)(2)                 51,001     51,001     51,001     51,001  
        Senior subordinated note (16.0%, due 12/15)(2)                 10,265     10,265     10,265     10,265  
        Common stock (37,024 shares)                 12,726     1,124     12,726     1,124  
                                                
Cook Inlet Alternative Risk, LLC   Risk management services   Senior secured loan (10.8%, due 4/13)                 87,286     69,000     87,286     69,000  
        Member interest                 552         552      
                                                
Digital VideoStream, LLC   Media content supply chain services company   Senior secured loan (11.0%, due 2/12)(2)                 13,155     12,825     13,155     12,825  
        Convertible subordinated note (10.0%, due 2/16)(2)                 4,883     4,883     4,883     4,883  
                                                
Diversified Mercury Communications, LLC   Business media consulting services   Senior secured loan (4.5%, due 3/13)                 2,803     2,525     2,803     2,525  
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

60


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Higginbotham Insurance Agency, Inc.(6)   Insurance agency   Junior secured loan (11.5%, due 8/13)                 27,174     27,174     27,174     27,174  
        Subordinated note (16.0%, due 8/14)                 25,955     25,955     25,955     25,955  
        Common stock (23,695 shares)                 23,695     12,355     23,695     12,355  
        Warrants                              
                                                
Impact Innovations Group, LLC(4)   Management consulting services   Member interest                     322         322  
                                                
Investor Group Services, LLC(5)   Financial consulting services   Member interest         500                     500  
                                                
Market Track Holdings, LLC   Business media consulting services company   Senior secured revolving loan (8.0%, due 6/14)                 2,450     2,392     2,450     2,392  
        Junior subordinated loan (15.9%, due 6/14)(2)                 24,504     23,166     24,504     23,166  
                                                
Multi-Ad Services, Inc.(5)   Marketing services and software provider   Senior secured loan (11.3%, due 11/11)                 2,491     2,488     2,491     2,488  
        Preferred equity                 1,737     1,206     1,737     1,206  
                                                
MVL Group, Inc.(4)   Marketing research provider   Senior secured loan (12.0%, due 7/12)                 25,256     25,256     25,256     25,256  
        Senior subordinated loan (14.5%, due 7/12)(2)                 41,402     36,021     41,402     36,021  
        Junior subordinated note (8.0%, due 7/12)(3)                 139         139      
        Common stock (560,716 shares)                 555         555      
                                                
PC Helps Support, LLC   Technology support provider   Senior secured loan (4.3%, due 12/13)                 8,210     7,763     8,210     7,763  
        Junior subordinated loan (12.8%, due 12/13)                 27,013     25,572     27,013     25,572  
                                                
Pendum Acquisition, Inc.(5)   Outsourced provider of ATM services   Common stock (8,872 shares)                              
                                                
Pillar Holdings LLC and PHL Holding Co.(5)   Mortgage services   Senior secured revolving loan (5.8%, due 11/13)     1,313     1,313                 1,313     1,313  
        Senior secured loan (14.5%, due 5/14)     7,375     7,375                 7,375     7,375  
        Senior secured loan (5.8%, due 11/13)     27,452     27,452                 27,452     27,452  
        Common stock (84.78 shares)     3,768     7,234                 3,768     7,234  
                                                
Primis Marketing Group, Inc. and Primis Holdings, LLC(5)   Database marketing services   Senior subordinated note (15.5%, due 2/13)(2)(3)     10,222     511                 10,222     511  
        Preferred units (4,000 units)     3,600                     3,600      
        Common units (4,000,000 units)     400                     400      
                                                
Prommis Solutions LLC, E-Default Services, LLC, Statewide Tax and Title Services, LLC and Statewide Publishing Services, LLC (formerly known as MR Processing Holding Corp.)   Bankruptcy and foreclosure processing services   Senior subordinated note (13.5%, due 2/14)(2)     52,892     51,834                 52,892     51,834  
        Preferred stock (30,000 shares)     3,000     6,221                 3,000     6,221  
                                                
Promo Works, LLC   Marketing services   Senior secured loan (12.3%, due 12/11)                 22,994     20,312     22,994     20,312  
                                                
R2 Acquisition Corp.   Marketing services   Common stock (250,000 shares)     250     250                 250     250  
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

61


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
SGT India Private Limited(5)   Technology consulting services   Common stock (150,596 shares)                 4,158         4,158      
                                                
Summit Business Media, LLC   Business media consulting services   Junior secured loan (15.0%, due 11/13)(2)(3)     10,276     1,600                 10,276     1,600  
                                                
Summit Energy Services, Inc.   Energy management consulting services   Common stock (415,982 shares)                 1,861     2,150     1,861     2,150  
                                                
Venturehouse-Cibernet Investors, LLC   Financial settlement services for intercarrier wireless roaming   Equity interest                              
                                                
VSS-Tranzact Holdings, LLC(5)   Management consulting services   Member interest     10,000     6,000                 10,000     6,000  
                                   
  Total             153,692     133,683     502,472     478,417     656,164     612,100  
                                   
                                                
Healthcare                                              
Air Medical Group Holdings LLC(5)   Medical escort services   Senior secured revolving loan (4.3%, due 3/11)                 4,642     4,456     4,642     4,456  
        Preferred stock                 2,993     20,000     2,993     20,000  
                                                
American Renal Associates, Inc.   Dialysis provider   Senior secured loan (8.5%, due 12/10)     1,082     1,082                 1,082     1,082  
        Senior secured loan (8.5%, due 12/11)     10,401     10,401                 10,401     10,401  
                                                
Axium Healthcare Pharmacy, Inc.   Specialty pharmacy provider   Senior subordinated note (8.0%, due 3/15)(2)                 2,975     2,380     2,975     2,380  
                                                
Capella Healthcare, Inc.   Acute care hospital operator   Junior secured loan (13.0%, due 2/16)     85,000     82,450                 85,000     82,450  
                                                
CT Technologies Intermediate Holdings, Inc. and CT Technologies Holdings, LLC(5)   Healthcare analysis services   Preferred stock (7,427 shares)     7,427     7,055                 7,427     7,055  
        Common stock (11,225 shares)     4,000     8,134                 4,000     8,134  
                                                
DSI Renal, Inc.   Dialysis provider   Senior secured revolving loan (5.3%, due 3/13)     7,890     6,788                 7,890     6,788  
        Senior secured loan (5.3%, due 4/14)     12,161     14,472                 12,161     14,472  
        Senior subordinated note (16.0%, due 4/14)(2)     77,114     59,840                 77,114     59,840  
                                                
GC Merger Sub I, Inc.   Drug testing services   Senior secured loan (4.3%, due 12/14)     22,320     20,064                 22,320     20,064  
                                                
HCP Acquisition Holdings, LLC(4)   Healthcare compliance advisory services   Class A units (10,062,095 units)     10,062     7,194                 10,062     7,194  
                                                
Heartland Dental Care, Inc.   Dental services   Senior subordinated note (14.3%, due 8/13)(2)     32,717     32,717                 32,717     32,717  
                                                
Insight Pharmaceuticals Corporation(4)   OTC drug products manufacturer   Senior subordinated note (15.0%, due 9/12)(2)                 54,100     52,098     54,100     52,098  
        Common stock (155,000 shares)                 40,413     10,419     40,413     10,419  
                                                
Magnacare Holdings, Inc., Magnacare Administrative Services, LLC, and Magnacare, LLC   Healthcare professional provider   Senior subordinated note (14.8%, due 12/12)(2)     3,241     4,646                 3,241     4,646  
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

62


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
MPBP Holdings, Inc., Cohr Holdings, Inc., and MPBP Acquisition Co., Inc.   Healthcare equipment services   Senior secured loan (due 1/14)     512     489                 512     489  
        Junior secured loan (6.5%, due 1/14)     32,000     8,000                 32,000     8,000  
        Common stock (50,000 shares)     5,000                     5,000      
                                                
MWD Acquisition Sub, Inc.   Dental services   Junior secured loan (6.5%, due 5/12)     5,000     4,350                 5,000     4,350  
                                                
OnCURE Medical Corp.   Radiation oncology care provider   Senior secured loan (3.8%, due 8/09)     3,076     2,707                 3,076     2,707  
        Senior subordinated note (12.5%, due 8/13)(2)     32,542     29,288                 32,542     29,288  
        Common stock (857,143 shares)     3,000     3,000                 3,000     3,000  
                                                
Passport Health Communications, Inc., Passport Holding Corp, and Prism Holding Corp.   Healthcare technology provider   Senior secured loan (10.5%, due 5/14)     24,471     23,981                 24,471     23,981  
        Series A preferred stock (1,594,457 shares)     9,900     9,900                 9,900     9,900  
        Common stock (16,106 shares)     100     100                 100     100  
                                                
PG Mergersub, Inc.   Provider of patient surveys, management reports and national databases for the integrated healthcare delivery system   Senior subordinated note (12.5%, due 3/16)     3,935     3,920                 3,935     3,920  
        Preferred stock (333 shares)     333     334                 333     334  
        Common stock (16,667 shares)     167     167                 167     167  
                                                
Reed Group, Ltd.   Medical disability management services provider   Senior secured loan (6.4%, due 12/13)                 11,929     9,530     11,929     9,530  
        Senior subordinated loan (15.8%, due 12/13)(2)                 19,013     14,924     19,013     14,924  
        Common equity                 1,800         1,800      
                                                
Regency Healthcare Group, LLC(5)   Hospice provider   Preferred member interest                 1,302     1,841     1,302     1,841  
                                                
The Schumacher Group of Delaware, Inc.   Outsourced physician service provider   Senior subordinated note (12.1%, due 7/12)(2)     36,138     36,138                 36,138     36,138  
                                                
Soteria Imaging Services, LLC(5)   Outpatient medical imaging provider   Junior secured loan (11.3%, due 11/10)                 4,204     4,154     4,204     4,154  
        Preferred member interest                 1,881     1,283     1,881     1,283  
                                                
Triad Laboratory Alliance, LLC   Laboratory services   Senior secured loan (8.5%, due 12/11)     4,116     4,282                 4,116     4,282  
        Senior subordinated note (13.8%, due 12/12)(2)     15,534     15,068                 15,534     15,068  
                                                
VOTC Acquisition Corp.   Radiation oncology care provider   Senior secured loan (13.0%, due 7/12)(2)     17,329     17,329                 17,329     17,329  
        Series E preferred shares (3,888,222 shares)     8,748     3,800                 8,748     3,800  
                                   
  Total             475,316     417,696     145,252     121,085     620,568     538,781  
                                   
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

63


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Services—Other                                              
3SI Security Systems, Inc.   Cash protection systems provider   Senior subordinated note (16.0%, due 8/13)(3)                 20,443     14,865     20,443     14,865  
        Subordinated loan (18.0%, due 8/13)(2)(3)                 9,030         9,030      
                                                
American Residential Services, LLC   Plumbing, heating and air-conditioning services   Junior secured loan (12.0%, due 4/15)(2)     20,505     19,685                 20,505     19,685  
                                                
Avborne, Inc.(4)   Maintenance, repair and overhaul service provider   Preferred stock (12,500 shares)                     904         904  
        Common stock (27,500 shares)                              
                                                
Avborne Heavy Maintenance, Inc.(4)   Maintenance, repair and overhaul service provider   Common stock (2,750 shares)                              
                                                
Aviation Properties Corporation(4)   Aviation services   Common stock (100 shares)                 93         93      
                                                
Coverall North America, Inc.(4)   Commercial janitorial service provider   Senior secured loan (12.0%, due 7/11)                 31,565     31,565     31,565     31,565  
        Senior subordinated note (15.0%, due 7/11)(2)                 5,553     5,553     5,553     5,553  
        Common stock (763,333 shares)                 14,362     21,261     14,362     21,261  
                                                
Diversified Collection Services, Inc.   Collections services   Senior secured loan (9.50%, due 8/11)     12,983     14,714                 12,983     14,714  
        Senior secured loan (13.8%, due 2/11)     1,931     1,931                 1,931     1,931  
        Senior secured loan (13.8%, due 8/11)     7,492     7,492                 7,492     7,492  
        Preferred stock (14,927 shares)     169     264                 169     264  
        Common stock (592,820 shares)     295     286     734     920     1,029     1,206  
                                                
Driven Brands, Inc.(5)   Automotive aftermarket service provider   Subordinated notes (15.0%, due 7/15)                 42,840     41,538     42,840     41,538  
        Subordinated loan (18.0%, due 7/15)(2)                 46,637     44,860     46,637     44,860  
        Common stock (3,772,098 shares)                 9,516     2,500     9,516     2,500  
                                                
Freedom Financial Network, LLC   Debt relief consulting services   Senior subordinated note (13.5%, due 2/14)                 5,953     6,000     5,953     6,000  
                                                
GCA Services Group, Inc.   Custodial services   Senior secured loan (12.0%, due 12/11)     37,788     37,889                 37,788     37,889  
                                                
Growing Family, Inc. and GFH Holdings, LLC   Photography services   Senior secured revolving loan (10.5%, due 8/11)(2)(3)     1,513     454                 1,513     454  
        Senior secured loan (13.0%, due 8/11)(2)(3)     11,188     3,356                 11,188     3,356  
        Senior secured loan (11.3%, due 8/11)(3)     372     111                 372     111  
        Senior secured loan (15.5%, due 8/11)(2)(3)     3,722     1,117                 3,722     1,117  
        Common stock (552,430 shares)     872                     872      
                                                
NPA Acquisition, LLC   Powersport vehicle auction operator   Junior secured loan (7.0%, due 2/13)     12,000     12,000                 12,000     12,000  
        Common units (1,709 shares)     1,000     2,300                 1,000     2,300  
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

64


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Tradesmen International, Inc.   Construction labor support   Junior secured loan (12.0%, due 12/12)                 39,793     18,347     39,793     18,347  
                                                
Trover Solutions, Inc.   Healthcare collections services   Junior subordinated loan (12.0%, due 11/12)(2)                 56,510     52,568     56,510     52,568  
                                                
United Road Towing, Inc.   Towing company   Junior secured loan (11.8%, due 1/14)                 18,988     18,792     18,988     18,792  
                                                
Web Services Company, LLC   Laundry service and equipment provider   Senior secured loan (5.3%, due 8/14)     4,582     4,802                 4,582     4,802  
        Senior subordinated loan (14.0%, due 8/16)(2)     43,743     41,556                 43,743     41,556  
                                   
  Total             160,155     147,957     302,017     259,673     462,172     407,630  
                                   
                                                
Consumer Products—Non-Durable                                          
Augusta Sportswear Group, Inc.(6)   Team apparel manufacturer   Common stock (2,500 shares)                 2,500     1,523     2,500     1,523  
                                                
Bushnell, Inc.   Sports optics manufacturer   Junior secured loan (6.8%, due 2/14)                 40,161     30,204     40,161     30,204  
                                                
CR Holding, Inc.(4)(6)   Cleaning products manufacturer   Senior subordinated note (16.6%, due 2/13)(2)(3)                 40,510     10,271     40,510     10,271  
        Common stock (32,090,696 shares)                 28,744         28,744      
                                                
Gilchrist & Soames, Inc.   Personal care manufacturer   Senior subordinated loan (13.4%, due 10/13)                 25,186     23,101     25,186     23,101  
                                                
The Homax Group, Inc.(6)   Home improvement products manufacturer   Senior secured loan (6.2%, due 10/12)(2)                 9,997     9,059     9,997     9,059  
        Senior secured revolver (8.0% due 10/12)(2)                 75     109     75     109  
        Senior subordinated note (14.5%, due 4/14)(2)                 13,619     4,945     13,619     4,945  
        Preferred stock (76 shares)                 76         76      
        Common stock (24 shares)                 5         5      
        Warrants                 954         954      
                                                
Innovative Brands, LLC   Consumer products and personal care manufacturer   Senior secured loan (15.5%, due 9/11)     17,421     17,421                 17,421     17,421  
                                                
Making Memories Wholesale, Inc.(4)   Scrapbooking branded products manufacturer   Senior secured loan (10.0%, due 8/14)     7,869     9,875                 7,869     9,875  
        Senior secured loan (15.0%, due 8/14)(2)     4,070     3,025                 4,070     3,025  
        Common stock (100 shares)                              
                                                
Progressive International Corporation(5)(6)   Kitchenware manufacturer   Preferred stock (500 shares)                 500     5,847     500     5,847  
        Common stock (197 shares)                 13     153     13     153  
        Warrants                              
                                                
Shoes for Crews, LLC   Safety footwear and slip-related mat manufacturer   Senior secured loan (5.5%, due 7/10)     304     302                 304     302  
                                                
The Step2 Company, LLC   Toy manufacturer   Senior secured loan (11.0%, due 4/12)(2)                 94,396     89,550     94,396     89,550  
        Equity interests                 2,156     1,528     2,156     1,528  
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

65


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
The Thymes, LLC(4)   Cosmetic products manufacturer   Preferred stock (8.0%, 6,283 shares)(2)     6,283     5,654                 6,283     5,654  
        Common stock (5,400 shares)                              
                                                
Wear Me Apparel, LLC(5)(6)   Clothing manufacturer   Senior subordinated note (17.5%, due 4/13)(2)(3)     24,110     18,083     127,316     71,345     151,426     89,428  
        Subordinated note (9.0%, due 4/14)(3)                 11,243         11,243      
        Common stock (10,086 shares)     10,000         39,549         49,549      
                                                
Woodstream Corporation   Pest control, wildlife caring and control products manufacturer   Senior subordinated note (12.0%, due 2/15)                 89,678     74,221     89,678     74,221  
        Common stock (6,960 shares)                 6,961     2,000     6,961     2,000  
                                   
  Total             70,057     54,360     533,639     323,856     603,696     378,216  
                                   
                                                
Restaurants and Food Services                                          
ADF Capital, Inc. and ADF Restaurant Group, LLC   Restaurant owner and operator   Senior secured revolving loan (6.5%, due 11/13)     3,418     3,418                 3,418     3,418  
        Senior secured loan (12.5%, due 11/12)(2)     34,691     34,684                 34,691     34,684  
        Promissory note (12.0%, due 11/16)(2)     13,093     13,795                 13,093     13,795  
        Warrants to purchase 0.61 shares         4,370                     4,370  
                                                
Encanto Restaurants, Inc.   Restaurant owner and operator   Junior secured loan (11.0%, due 8/13)(2)     25,438     24,166                 25,438     24,166  
                                                
Hot Light Brands, Inc.(4)   Restaurant owner and operator   Senior secured loan (9.0%, due 2/11)(3)                 30,572     10,471     30,572     10,471  
        Common stock (93,500 shares)                 5,151         5,151      
                                                
Hot Stuff Foods, LLC(4)   Convenience food service retailer   Senior secured loan (3.7%, due 2/11)                 610     610     610     610  
        Senior secured loan (3.7%, due 2/12)                 44,700     44,807     44,700     44,807  
        Junior secured loan (7.2% due 8/12)(3)                 31,237     34,900     31,237     34,900  
        Senior subordinated note (15.0%, due 2/13)(2)(3)                 31,401     14,901     31,401     14,901  
        Subordinated note (16.0%, due 2/13)(2)(3)                 20,749         20,749      
        Common stock (1,147,453 shares)                 56,187         56,187      
                                                
Huddle House, Inc.(4)   Restaurant owner and operator   Senior subordinated note (15.0%, due 12/15)(2)                 19,494     19,494     19,494     19,494  
        Common stock (358,428 shares)                 36,348     7,651     36,348     7,651  
                                                
OTG Management, Inc.   Airport restaurant operator   Junior secured loan (20.5%, due 6/13)(2)     15,884     15,884                 15,884     15,884  
        Warrants to purchase 89,000 shares         750                     750  
                                                
S.B. Restaurant Company   Restaurant owner and operator   Senior secured loan (9.8%, due 4/11)                 38,184     33,606     38,184     33,606  
        Preferred stock (46,690 shares)                 117         117      
        Warrants                 534         534      
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

66


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Vistar Corporation and Wellspring Distribution Corporation   Food service distributor   Senior subordinated note (13.5%, due 5/15)     73,625     69,944                 73,625     69,944  
        Class A non-voting common stock (1,366,120 shares)     7,500     3,253                 7,500     3,253  
                                   
  Total             173,649     170,264     315,284     166,440     488,933     336,704  
                                   
                                                
Beverage, Food and Tobacco                                              
3091779 Nova Scotia Inc.   Baked goods manufacturer   Junior secured loan (14.0%, due 11/12)(2)     15,047     11,278                 15,047     11,278  
        Senior secured revolving loan (8.0%, due 11/12)     6,757     7,127                 6,757     7,127  
        Warrants to purchase 57,545 shares                              
                                                
Apple & Eve, LLC and US Juice Partners, LLC(5)   Juice manufacturer   Senior secured loan (14.5%, due 10/13)     36,086     35,726                 36,086     35,726  
        Senior units (50,000 units)     5,000     3,500                 5,000     3,500  
                                                
Best Brands Corporation   Baked goods manufacturer   Senior secured loan (7.5%, due 12/12)(2)     10,966     13,135                 10,966     13,135  
        Senior secured loan (7.5%, due 6/13)(2)     7,462     8,759                 7,462     8,759  
        Junior secured loan (16.0%, due 6/13)(2)     48,397     49,036                 48,397     49,036  
                                                
Border Foods, Inc.(4)   Green chile and jalapeno products manufacturer   Senior secured loan (12.9%, due 3/12)                 29,495     34,876     29,495     34,876  
        Preferred stock (100,000 shares)                 12,721     16,585     12,721     16,585  
        Common stock (260,467 shares)                 3,847         3,847      
                                                
Bumble Bee Foods, LLC and BB Co-Invest LP   Canned seafood manufacturer   Senior subordinated loan (16.3%, due 11/18)(2)     30,756     30,756                 30,756     30,756  
        Common stock (4,000 shares)     4,000     5,700                 4,000     5,700  
                                                
Charter Baking Company, Inc.   Baked goods manufacturer   Senior subordinated note (13.0%, due 2/13)(2)     5,874     5,874                 5,874     5,874  
        Preferred stock (6,258 shares)     2,500     1,725                 2,500     1,725  
                                                
Distant Lands Trading Co.   Coffee manufacturer   Senior secured revolving loan (6.3%, due 11/11)                 6,781     6,358     6,781     6,358  
        Senior secured loan (11.0%, due 11/11)                 43,499     41,967     43,499     41,967  
        Common stock (3,451 shares)                 3,451     1,147     3,451     1,147  
                                                
Farley's & Sathers Candy Company, Inc.(6)   Confections manufacturer   Junior secured loan (8.3%, due 3/11)                 2,496     2,492     2,496     2,492  
                                                
Ideal Snacks Corporation   Snacks manufacturer   Senior secured loan (8.5%, due 6/11)                 1,084     1,068     1,084     1,068  
                                   
  Total             172,845     172,616     103,374     104,493     276,219     277,109  
                                   
                                                
Education                                              
Campus Management Corp. and Campus Management Acquisition Corp.(5)   Education software developer   Senior secured loan (16.0%, due 8/13)(2)     33,774     33,774                 33,774     33,774  
        Senior secured loan (13.0%, due 8/13)(2)     9,028     9,028                 9,028     9,028  
        Preferred stock (8.0%, 493,147 shares)(2)     8,952     12,800                 8,952     12,800  
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

67


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Community Education Centers, Inc.   Offender re-entry and in-prison treatment services provider   Senior subordinated loan (19.5%, due 11/13)(2)                 36,602     36,501     36,602     36,501  
                                                
eInstruction Corporation   Developer, manufacturer and retailer of educational products   Junior secured loan (7.8%, due 7/14)                 16,938     15,471     16,938     15,471  
        Subordinated loan (16.0%, due 1/15)(2)                 19,013     17,237     19,013     17,237  
        Common stock (2,406 shares)                 2,500     750     2,500     750  
                                                
ELC Acquisition Corporation   Developer, manufacturer and retailer of educational products   Senior secured loan (3.5%, due 11/12)     162     154                 162     154  
        Junior secured loan (7.3%, due 11/13)     8,333     7,917                 8,333     7,917  
                                                
Instituto de Banca y Comercio, Inc. Leeds IV Advisors, Inc.   Private school operator   Senior secured revolving loan (6.5%, due 3/14)     1,232     1,232                 1,232     1,232  
        Senior secured loan (8.5%, due 3/14)     11,730     11,730                 11,730     11,730  
        Senior subordinated loan (16.0%, due 6/14)(2)     30,644     30,644                 30,644     30,644  
        Preferred stock (306,388 shares)     1,456     3,479                 1,456     3,479  
        Common stock (354,863 shares)     89     4,029                 89     4,029  
                                                
Lakeland Finance, LLC   Private school operator   Senior secured note (11.5%, due 12/12)     33,000     33,000                 33,000     33,000  
                                                
R3 Education, Inc.(5)   Medical school operator   Senior secured revolving loan (6.3%, due 12/12)     1,186     1,162                 1,186     1,162  
        Senior secured loan (6.3%, due 12/12)     21,388     20,960                 21,388     20,960  
        Member interest     15,800     17,185                 15,800     17,185  
        Preferred stock (8,800 shares)     2,200     2,200                 2,200     2,200  
                                   
  Total             178,974     189,294     75,053     69,959     254,027     259,253  
                                   
                                                
Manufacturing                                              
Arrow Group Industries, Inc.   Residential and outdoor shed manufacturer   Senior secured loan (5.3%, due 4/10)     5,653     5,223                 5,653     5,223  
                                                
Broadcast Electronics, Inc.(6)   Radio manufacturer   Senior secured loan (8.8%, due 11/11)(2)(3)                 4,847     340     4,847     340  
        Preferred stock (2,044 shares)                              
                                                
Component Hardware Group, Inc.   Commercial equipment manufacturer   Senior subordinated note (13.5%, due 1/13)(2)                 18,876     16,587     18,876     16,587  
                                                
Emerald Performance Materials, LLC   Polymers and performance materials manufacturer   Senior secured loan (8.3%, due 5/11)     9,554     9,172                 9,554     9,172  
        Senior secured loan (8.5%, due 5/11)     156     150                 156     150  
        Senior secured loan (10.0%, due 5/11)     1,604     1,508                 1,604     1,508  
        Senior secured loan (16.0%, due 5/11)(2)     4,900     4,704                 4,900     4,704  
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

68


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Jakel, Inc.(4)   Electric motor manufacturer   Senior subordinated loan (15.5%, due 3/08)(2)(3)                 748     374     748     374  
                                                
NetShape Technologies, Inc.   Metal precision engineered components manufacturer   Senior secured loan (4.0%, due 2/13)                 875     368     875     368  
                                                
Penn Detroit Diesel Allison, LLC(4)   Diesel engine manufacturer   Member interest                 20,081     13,870     20,081     13,870  
                                                
Postle Aluminum Company, LLC(5)   Aluminum distribution provider   Senior secured loan (6.0%, due 10/12)(2)(3)                 34,876     15,308     34,876     15,308  
        Senior subordinated loan (3.0%, due 10/12)(2)(3)                 23,868         23,868      
        Member interest                 2,174         2,174      
                                                
Qualitor, Inc.   Automotive aftermarket components supplier   Senior secured loan (6.0%, due 12/11)     1,743     1,656                 1,743     1,656  
        Junior secured loan (9.0%, due 6/12)     5,000     4,750                 5,000     4,750  
                                                
Reflexite Corporation(4)   Developer and manufacturer of high-visibility reflective products   Senior subordinated loan (18.0%, due 2/15)(2)     16,557     16,557                 16,557     16,557  
        Common stock (1,821,860 shares)     27,435     24,898                 27,435     24,898  
                                                
Saw Mill PCG Partners LLC   Precision components manufacturer   Common units (1,000 units)     1,000                     1,000      
                                                
Service Champ, Inc.(4)   Automotive aftermarket components supplier   Senior subordinated loan (15.5%, due 4/12)(2)                 27,515     27,515     27,515     27,515  
        Common stock (55,112 shares)                 11,785     28,321     11,785     28,321  
                                                
Stag-Parkway, Inc.(4)   Automotive aftermarket components supplier   Junior subordinated loan (10.0%, due 7/12)                 19,000     19,000     19,000     19,000  
        Common stock (25,000 shares)                 32,686     7,359     32,686     7,359  
                                                
STS Operating, Inc.   Hydraulic systems equipment and supplies provider   Senior subordinated note (11.0%, due 1/13)                 30,313     27,305     30,313     27,305  
                                                
Tappan Wire & Cable Inc.   Specialty wire and cable manufacturer   Senior secured loan (15.0%, due 8/14)(3)                 22,248     4,515     22,248     4,515  
        Common stock (12,940 shares)                 2,043         2,043      
        Warrant                              
                                                
TransAmerican Auto Parts, LLC   Automotive aftermarket parts retailer and supplier   Senior subordinated note (18.3%, due 11/12)(2)(3)                 24,409         24,409      
        Preferred member interest                 923         923      
        Common member interest                 110         110      
                                                
Universal Trailer Corporation(5)   Livestock and specialty trailer manufacturer   Common stock (74,920 shares)     7,930                     7,930      
                                   
  Total             81,532     68,618     277,377     160,862     358,909     229,480  
                                   
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

69


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Retail                                              
Apogee Retail, LLC   For-profit thrift retailer   Senior secured loan (5.5%, due 3/12)     4,840     4,356                 4,840     4,356  
        Senior secured loan (16.0%, due 11/12)(2)     11,296     11,296                 11,296     11,296  
        Senior secured loan (5.5%, due 3/12)     38,438     34,595                 38,438     34,595  
                                                
Dufry AG   Retail newsstand operator   Common stock (39,056 shares)     3,000     2,200                 3,000     2,200  
                                                
Savers, Inc. and SAI Acquisition Corp.   For-profit thrift retailer   Senior subordinated note (12.0%, due 8/14)(2)     28,280     27,715                 28,280     27,715  
        Common stock (1,170,182 shares)     4,500     5,840                 4,500     5,840  
                                                
Things Remembered, Inc. and TRM Holdings Corporation   Personalized gift retailer   Senior secured loan (6.5%, due 9/12)(2)     40,211     28,148                 40,211     28,148  
        Preferred stock (800 shares)     200                     200      
        Common stock (80 shares)     1,800                     1,800      
        Warrants to purchase 858 common shares                              
        Warrants to purchase 73 preferred shares                              
                                   
  Total             132,565     114,150             132,565     114,150  
                                   
                                                
Consumer Products—Durable                                          
Carlisle Wide Plank Floors, Inc.   Hardwood floor manufacturer   Senior secured loan (12.0%, due 6/11)                 1,637     1,533     1,637     1,533  
        Common stock (345,056 shares)                 345         345      
                                                
Direct Buy Holdings, Inc. and Direct Buy Investors, LP(5)   Membership based buying club franchisor and operator   Senior secured loan (6.8%, due 11/12)     2,199     1,710                 2,199     1,710  
        Senior subordinated note (16.0%, due 5/13)(2)                 76,139     60,287     76,139     60,287  
        Limited partnership interest                 8,000         8,000      
        Limited partnership interest     10,000     2,500                 10,000     2,500  
                                                
Havco Wood Products LLC   Laminated oak and fiber-reinforced composite flooring manufacturer for trailers   Member interest                 910         910      
                                   
  Total             12,199     4,210     87,031     61,820     99,230     66,030  
                                   
                                                
Computers and Electronics                                              
Network Hardware Resale, Inc.   Networking equipment resale provider   Senior secured loan (12.8%, due 12/11)(2)                 16,382     16,330     16,382     16,330  
        Convertible subordinated loan (9.8%, due 12/15)(2)                 16,000     16,000     16,000     16,000  
                                                
RedPrairie Corporation   Software manufacturer   Junior secured loan (7.0%, due 1/13)     15,300     14,535                 15,300     14,535  
                                                
TZ Merger Sub, Inc.   Computers and electronics   Senior secured loan (7.5%, due 7/15)     4,726     4,830                 4,726     4,830  
                                                
X-rite, Incorporated   Artwork software manufacturer   Junior secured loan (14.4%, due 7/13)     10,906     10,906                 10,906     10,906  
                                   
  Total             30,932     30,271     32,382     32,330     63,314     62,601  
                                   
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

70


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Printing, Publishing and Media                                          
Canon Communications LLC   Print publications services   Junior secured loan (13.8%, due 11/11)(2)     24,032     20,435                 24,032     20,435  
                                                
Courtside Acquisition Corp.   Community newspaper publisher   Senior subordinated loan (17.0%, due 6/14)(2)(3)     34,295                     34,295      
                                                
EarthColor, Inc.   Printing management services   Subordinated note (15.0%, due 11/13)(2)(3)                 123,385         123,385      
        Common stock (63,438 shares)                 63,438         63,438      
        Warrants                              
                                                
LVCG Holdings LLC(4)   Commercial printer   Member interest     6,600     1,980                 6,600     1,980  
                                                
National Print Group, Inc.   Printing management services   Senior secured revolving loan (9.0%, due 3/12)     1,826     1,114                 1,826     1,114  
        Senior secured revolving loan (8.3%, due 3/12)     272     166                 272     166  
        Senior secured loan (16.0%, due 3/12)(2)     8,016     4,928                 8,016     4,928  
        Preferred stock (9,344 shares)     2,000                     2,000      
                                                
The Teaching Company, LLC and The Teaching Company Holdings, Inc.   Education publications   Senior secured loan (10.5%, due 9/12)     28,000     28,000                 28,000     28,000  
        Preferred stock (29,969 shares)     2,997     3,873                 2,997     3,873  
        Common stock (15,393 shares)     3     4                 3     4  
                                   
  Total             108,041     60,500     186,823         294,864     60,500  
                                   
                                                
Aerospace & Defense                                              
AP Global Holdings, Inc.   Safety and security equipment manufacturer   Senior secured loan (4.8%, due 10/13)     7,671     7,110                 7,671     7,110  
                                                
ILC Industries, Inc.   Industrial products provider   Junior secured loan (11.5%, due 8/12)     12,000     12,000                 12,000     12,000  
                                                
Thermal Solutions LLC and TSI Group, Inc.   Thermal management and electronics packaging manufacturer   Senior secured loan (4.0%, due 3/11)     572     549                 572     549  
        Senior secured loan (4.5%, due 3/12)     2,740     2,494                 2,740     2,494  
        Senior subordinated notes (14.0%, due 3/13)(2)     2,730     2,593                 2,730     2,593  
        Senior subordinated notes (14.3%, due 9/12)(2)     5,544     5,267                 5,544     5,267  
        Preferred stock (71,552 shares)     716     716                 716     716  
        Common stock (1,460,246 shares)     15     15                 15     15  
                                                
Wyle Laboratories, Inc. and Wyle Holdings, Inc.   Provider of specialized engineering, scientific and technical services   Junior secured loan (15.0%, due 7/14)     28,000     28,000                 28,000     28,000  
        Junior preferred stock (10.0%, 14,655 shares)(2)     1,816     1,455                 1,816     1,455  
        Senior preferred stock (8.0%, 775 shares)(2)     96     77                 96     77  
        Common stock (151,439)     188     148                 188     148  
                                   
  Total             62,088     60,424             62,088     60,424  
                                   
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

71


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Telecommunications                                              
American Broadband Communications, LLC and American Broadband Holding Co.   Broadband communication services   Senior subordinated loan (18.0%, due 11/14)(2)     42,584     42,584                 42,584     42,584  
        Warrants to purchase 170 shares                              
                                                
Startec Equity, LLC(4)   Communication services   Member interest                 211         211      
                                   
Total Telecommunications             42,584     42,584     211         42,795     42,584  
                                   
                                                
Oil and Gas                                              
Geotrace Technologies, Inc.   Reservoir processing, development services, and data management services   Warrants                 2,027     2,300     2,027     2,300  
                                                
IAT Equity, LLC and Affiliates d/b/a Industrial Air Tool(4)   Industrial products distributor   Senior subordinated note (9.0%, due 6/14)                 6,000     6,000     6,000     6,000  
        Member interest                 7,500     9,948     7,500     9,948  
                                                
UL Holding Co., LLC   Petroleum product manufacturer   Senior secured loan (9.3%, due 12/12)     10,945     10,726                 10,945     10,726  
        Senior secured loan (14.0%, due 12/12)     6,965     6,825                 6,965     6,825  
        Senior secured loan (9.4%, due 12/12)     2,985     2,925                 2,985     2,925  
        Common units (100,000 units)     500     500                 500     500  
                                   
  Total             21,395     20,976     15,527     18,248     36,922     39,224  
                                   
                                                
Environmental Services                                              
AWTP, LLC   Water treatment services   Junior secured loan (11.5%, due 12/12)(3)     13,682     6,841                 13,682     6,841  
                                                
Mactec, Inc.   Engineering and environmental services   Class B-4 stock (16 shares)                              
        Class C stock (5,556 shares)         150                     150  
                                                
Oahu Waste Services, Inc.   Waste management services   Stock appreciation rights                 206     406     206     406  
                                                
Sigma International Group, Inc.   Water treatment parts manufacturer   Junior secured loan (15.0%, due 10/13)     17,500     12,250                 17,500     12,250  
                                                
Universal Environmental Services, LLC(5)   Hydrocarbon recycling and related waste management services and products   Preferred member interest                 1,599         1,599      
                                                
Waste Pro USA, Inc.   Waste management services   Class A common stock (611,614.80 shares)     12,263     13,263                 12,263     13,263  
                                                
Wastequip, Inc.(5)   Waste management equipment manufacturer   Senior subordinated loan (12.0%, due 2/15)(2)     13,030     3,936                 13,030     3,936  
        Common stock (13,889 shares)     1,389                     1,389      
                                   
  Total             57,864     36,440     1,805     406     59,669     36,846  
                                   
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

72


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Cargo Transport                                              
The Kenan Advantage Group, Inc.   Fuel transportation provider   Senior subordinated note (13.0%, due 12/13)(2)     25,899     25,381                 25,899     25,381  
        Senior secured loan (3.0%, due 12/11)     2,407     2,238                 2,407     2,238  
        Preferred stock (10,984 shares)     1,098     1,459                 1,098     1,459  
        Common stock (30,575 shares)     31     41                 31     41  
                                   
  Total             29,435     29,119             29,435     29,119  
                                   
                                                
Health Clubs                                              
Athletic Club Holdings, Inc.   Premier health club operator   Senior secured loan (4.8%, due 10/13)     26,741     23,532                 26,741     23,532  
        Senior secured loan (7.8%, due 10/13)     4     4                 4     4  
        Senior secured loan (6.8%, due 10/13)     5     4                 5     4  
                                   
  Total             26,750     23,540             26,750     23,540  
                                   
                                                
Buildings and Real Estate                                              
10th Street, LLC(5)   Document storage and management services   Senior subordinated note (13.0%, due 11/14)(2)                 22,004     22,100     22,004     22,100  
        Member interest                 422     485     422     485  
        Option                 25     25     25     25  
                                   
  Total                     22,451     22,610     22,451     22,610  
                                   
                                                
Containers—Packaging                                              
Industrial Container Services, LLC(5)   Industrial container manufacturer reconditioner and servicer   Senior secured loan (4.3%, due 9/11)     14,104     13,400                 14,104     13,400  
        Common stock (1,800,000 shares)     1,800     8,550                 1,800     8,550  
                                   
  Total             15,904     21,950             15,904     21,950  
                                   
                                                
Grocery                                              
Planet Organic Health Corp.   Organic grocery store operator   Junior secured loan (13.0%, due 7/14)     11,099     10,554                 11,099     10,554  
        Senior subordinated loan (17.0%, due 7/12)(2)     12,288     9,873                 12,288     9,873  
                                   
  Total             23,387     20,427             23,387     20,427  
                                   
                                                
Hotels, Motels, Inns & Gaming                                          
Crescent Equity Corporation(4)   Hospitality management services   Senior secured loan (10.0%, due 6/10)                 433     433     433     433  
        Subordinated notes (11.0%, due 9/11)(3)                 2,106         2,106      
        Subordinated notes (11.0%, due 1/12)(3)                 7,189     997     7,189     997  
        Subordinated notes (11.0%, due 9/12)(3)                 10,769     1,464     10,769     1,464  
        Subordinated notes (11.0%, due 6/17)(3)                 12,048     1,742     12,048     1,742  
        Common stock (174 shares)                 82,730         82,730      
                                   
  Total                     115,275     4,636     115,275     4,636  
                                   
                                                

See accompanying notes to pro forma condensed consolidated financial statements.

73


 
   
   
  Ares Capital   Allied Capital   Pro Forma
Ares Capital
 
Company
  Description   Investment   Cost   Fair
Value
  Cost   Fair
Value
  Cost   Fair
Value
 
Housing—Building Materials                                          
HB&G Building Products   Synthetic and wood product manufacturer   Senior subordinated loan (19.0%, due 3/11)(2)(3)     8,984     448                 8,984     448  
        Common stock (2,743 shares)     753                     753      
        Warrants to purchase 4,464 shares     653                     653      
                                   
  Total             10,390     448             10,390     448  
                                   
                                                
Commercial Real Estate Finance                                          
Commercial Mortgage Loans   3 loans   Up to 6.99%                 32,143     31,006     32,143     31,006  
    2 loans   7.00% - 8.99%                 1,876     1,864     1,876     1,864  
    1 loan   9.00% - 10.99%                 6,476     6,476     6,476     6,476  
    1 loan   11.00% - 12.99%                 10,479     6,319     10,479     6,319  
    2 loans   15.00% and above                 3,970     4,848     3,970     4,848  
                                                
Real Estate Owned                         5,937     6,179     5,937     6,179  
                                                
Real Estate Equity Interests                         13,185     11,831     13,185     11,831  
                                   
  Total                     74,066     68,523     74,066     68,523  
                                   
                                                
Other                                              
Other Companies       Other debt investments                 (151 )   (151 )   (151 )   (151 )
        Other equity investments                 41     8     41     8  
                                   
  Total                     (110 )   (143 )   (110 )   (143 )
                                   
                                                
Pro Forma Adjustments:                                              
  Actual Sales of Allied Capital Investments subsequent to September 30, 2009(6)                 (536,379 )   (359,356 )   (536,379 )   (359,356 )
  Estimated Purchase Price Allocation Adjustment(1)                                       (258,326 )
                                   
Total Investments           $ 2,245,137   $ 1,967,724   $ 3,731,955   $ 2,151,838   $ 5,977,092   $ 3,861,236  
                                   

(1)
Upon consumation of the Allied Acquisition and in accordance with ASC 805-10 (previously SFAS No. 141(r)), Business Combinations, Ares Capital will be required to allocate the purchase price of Allied Capital's assets based on Ares Capital's estimate of fair value and record such fair value as the cost basis and initial fair value of each such investment in Ares Capital's financial statements. In this regard, Ares Capital's management determined that the aggregate adjustment to Allied Capital's investments approximates $258.3 million. As a result, such adjustment has been reflected in a single line item entitled "Estimated Purchase Price Allocation Adjustment." However, a final determination of the fair value of Allied Capital's investments will be made after the Allied Acquisition is completed and, as a result, the actual amount of this adjustment may vary from the preliminary amount set forth herein. Thus, the information set forth in the columns reflect historical amounts and have not been individually adjusted to reflect the Estimated Purchase Price Allocation Adjustment.

(2)
Has a payment-in-kind (PIK) interest feature.

(3)
Loan is on non-accrual status at September 30, 2009.

(4)
As defined in the Investment Company Act, the combined company "Controls" this portfolio company because it owns 25% or more of its outstanding voting securities and/or the combined company has the power to exercise control over the management or policies of the portfolio company.

(5)
As defined in the Investment Company Act, the combined company is an "Affiliated Person" to this portfolio company because it owns 5% or more of its outstanding voting securities and/or the combined company has the power to exercise control over the management or policies of the portfolio company (including through a management agreement).

(6)
Allied Capital's investment was fully or partially sold subsequent to September 30, 2009. Total net realized losses on these sales were $173 million and the related reversal of net unrealized depreciation was $177 million. Allied Capital's $165 million investment in the SL Fund was sold to Ares Capital subsequent to September 30, 2009. Allied Capital's $33 million investment in the Allied Capital Senior Debt Fund, L.P., now referred to as "Ivy Hill SDF," was sold to IHAM, a portfolio company of Ares Capital, subsequent to September 30, 2009.

See accompanying notes to pro forma condensed consolidated financial statements.

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Ares Capital Corporation and Subsidiaries
Notes to Pro Forma Condensed Consolidated Financial Statements
Unaudited
(In thousands, except share and per share data unless otherwise stated)

1.     BASIS OF PRO FORMA PRESENTATION

              The unaudited pro forma condensed consolidated financial information related to the Allied Acquisition is included as of and for the nine months ended September 30, 2009 and for the year ended December 31, 2008. On October 26, 2009, Ares Capital and Allied Capital entered into the Merger Agreement. For the purposes of the pro forma condensed consolidated financial statements, the purchase price is currently estimated at approximately $862 million, which is based upon a price of $14.18 per share (last closing price as of January 20, 2010) of Ares Capital common stock and an implied value per share of Allied Capital common stock of $4.61. The pro forma adjustments included herein reflect the conversion of Allied Capital common stock into Ares Capital common stock using an exchange ratio of 0.325 of a share of Ares Capital common stock for each of the approximately 179.4 million shares of Allied Capital common stock outstanding as of September 30, 2009.

              The Allied Acquisition will be accounted for as an acquisition of Allied Capital by Ares Capital in accordance with the acquisition method of accounting as detailed in ASC 805-10 (previously SFAS No. 141(R)), Business Combinations. The acquisition method of accounting requires an acquiror to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree based on their fair values as of the date of acquisition. As described in more detail in ASC 805-10, goodwill, if any, will be recognized as of the acquisition date, for the excess of the consideration transferred over the fair value of identifiable net assets acquired. If the total acquisition date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred, the excess will be recognized as a gain. In connection with the Allied Acquisition and subsequent combination, the estimated fair value of the net assets to be acquired is currently anticipated to exceed the purchase price, and based on Ares Capital's preliminary purchase price allocation, a gain of approximately $204 million is currently expected to be recorded by Ares Capital in the period the Allied Acquisition and subsequent combination are completed.

              Under the Investment Company Act rules, the regulations pursuant to Article 6 of Regulation S-X and the American Institute of Certified Public Accountants' Audit and Accounting Guide for Investment Companies, Ares Capital is precluded from consolidating any entity other than another investment company or an operating company that provides substantially all of its services and benefits to Ares Capital. Ares Capital's financial statements include its accounts and the accounts of all its consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

              In determining the value of the assets to be acquired, Ares Capital uses ASC 820-10 (previously SFAS No. 157), Fair Value Measurements, which expands the application of fair value accounting. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure of fair value measurements. ASC 820-10 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires Ares Capital to assume that the portfolio investment is sold in a principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820-10, Ares Capital has considered its principal market as the market in which Ares Capital exits its portfolio investments with the greatest volume and level of activity. ASC 820-10 specifies a hierarchy of valuation techniques based on whether the inputs

75



to those valuation techniques are observable or unobservable. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below:

              In addition to using the above inputs in investment valuations, Ares Capital continues to employ the relevant provisions of its valuation policy, which policy is consistent with ASC 820-10. Consistent with Ares Capital's valuation policy, the source of inputs, including any markets in which Ares Capital's investments are trading (or any markets in which securities with similar attributes are trading), are evaluated in determining fair value. Ares Capital's valuation policy considers the fact that because there is not a readily available market value for most of the investments in Ares Capital's portfolio, the fair value of its investments must typically be determined using unobservable inputs.

              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 Ares Capital's investments may fluctuate from period to period. Additionally, the fair value of Ares Capital's investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that Ares Capital may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If Ares Capital were required to liquidate a portfolio investment in a forced or liquidation sale, Ares Capital may realize significantly less than the value at which Ares Capital has recorded it.

              The following table presents fair value measurements of investments for the pro forma combined company as of September 30, 2009:

 
   
  Fair Value Measurements Using  
 
  Total   Level 1   Level 2   Level 3  

Investments

  $ 3,861,236   $   $ 27,904   $ 3,833,332  

              The following tables present changes in investments that use Level 3 inputs between the actual September 30, 2009 amounts and those presented for the pro forma combined company as of September 30, 2009:

 
  Ares Capital   Allied Capital   Pro Forma
Adjustments
  Pro Forma
Ares Capital
Combined
 

Actual balance as of September 30, 2009

  $ 1,939,820   $ 2,511,194   $   $ 4,451,014  

Estimated purchase price allocation adjustment

            (258,326 )   (258,326 )

Actual sales of Allied Capital investments subsequent to September 30, 2009

        (359,356 )       (359,356 )

Net transfers in and/or out of Level 3

                 
                   

Pro Forma Balance as of September 30, 2009

  $ 1,939,820   $ 2,151,838   $ (258,326 ) $ 3,833,332  
                   

              As of September 30, 2009, the net unrealized loss on the investments that use Level 3 inputs for the pro forma combined company was $1.6 billion.

              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 would be realized based on the valuations currently assigned.

76


              Certain other transactions that affect the purchase price that occurred subsequent to September 30, 2009 have been adjusted for in the unaudited pro forma condensed consolidated balance sheet. These primarily include sales of investments and receivables of $378 million for Allied Capital as well as the related paydown of $176 million of debt of Allied Capital.

              The unaudited pro forma condensed consolidated financial information includes preliminary estimated purchase price allocation adjustments to record the assets and liabilities of Allied Capital at their respective estimated fair values and represents Ares Capital's management's estimates based on available information. The pro forma adjustments included herein may be revised as additional information becomes available and as additional analyses are performed. The final allocation of the purchase price will be determined after the Allied Acquisition and subsequent combination are completed and after completion of a final analysis to determine the estimated fair values of Allied Capital's assets and liabilities. Accordingly, the final purchase accounting adjustments and integration charges may be materially different from the pro forma adjustments presented in this document. Increases or decreases in the estimated fair values of the net assets, commitments, and other items of Allied Capital as compared to the information shown in this document may change the amount of the purchase price allocated to goodwill or recognized as income in accordance with ASC 805-10.

              Ares Capital has elected to be treated as a RIC under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, Ares Capital is required to timely distribute to its stockholders generally at least 90% of its investment company taxable income, as defined by the Code, for each year. The unaudited pro forma condensed consolidated financial information reflects that Ares Capital has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve Ares Capital from U.S. federal income taxes.

              The unaudited pro forma condensed consolidated financial information presented in this document is for illustrative purposes only and does not necessarily indicate the results of operations or the combined financial position that would have resulted had the Allied Acquisition and subsequent combination been completed at the beginning of the applicable period presented, nor the impact of expense efficiencies, asset dispositions, share repurchases and other factors. The unaudited pro forma condensed consolidated financial information is not indicative of the results of operations in future periods or the future financial position of the combined company.

2.     PRELIMINARY PURCHASE ACCOUNTING ALLOCATIONS

              The unaudited pro forma condensed consolidated financial information for the Allied Acquisition and subsequent combination includes the unaudited pro forma condensed consolidated balance sheet as of September 30, 2009 assuming the Allied Acquisition and subsequent combination were completed on September 30, 2009. The unaudited pro forma condensed consolidated income statements for the nine months ended September 30, 2009 and for the year ended December 31, 2008 were prepared assuming the Allied Acquisition and subsequent combination were completed on January 1, 2008.

              The unaudited pro forma condensed consolidated financial information reflects the issuance of approximately 58.3 million shares of Ares Capital common stock in connection with the Allied Acquisition.

              The Allied Acquisition and subsequent combination will be accounted for using the purchase method of accounting; accordingly, Ares Capital's cost to acquire Allied Capital will be allocated to the assets and liabilities of Allied Capital at their respective fair values estimated by Ares Capital as of the acquisition date. The amount of the total acquisition date fair value of the identifiable net assets acquired that exceeds the total purchase price, if any, will be recognized as a gain. Accordingly, the pro

77



forma purchase price has been allocated to the assets acquired and the liabilities assumed based on Ares Capital's currently estimated fair values as summarized in the following table:

Common stock issued

  $ 826,589  

Payment of "in-the-money" Allied Capital stock options

    35,871 (1)
       

Total purchase price

  $ 862,460  
       

Assets acquired:

       

Investments

  $ 1,893,512  

Cash and cash equivalents

    35,872  

Other assets

    123,239  
       
 

Total assets acquired

    2,052,623  

Debt and other liabilities assumed

    (986,106 )
       

Net assets acquired

    1,066,517  
       

Gain on acquisition of Allied Capital

    (204,057 )
       

  $ 862,460  
       

(1)
Holders of any "in-the-money" Allied Capital stock options have the right to either receive cash or stock. For the purposes of the pro forma condensed consolidated financial statements, it is assumed that the options will be paid in cash. The amount does not include the effect of options for 588,336 shares of Allied common stock that have been exercised since September 30, 2009.

3.     PRELIMINARY PRO FORMA ADJUSTMENTS

              The preliminary pro forma purchase accounting allocation included in the unaudited pro forma condensed consolidated financial information is as follows:

A.
To reflect Allied Capital's September 30, 2009 balance sheet, updated for estimated changes subsequent to September 30, 2009:

 
  Allied Capital
Actual
September 30, 2009
  Pro Forma
Adjustments(1)
  Adjusted
Allied Capital
September 30, 2009
 

Investments

  $ 2,511,194   $ (359,356 ) $ 2,151,838  

Cash and cash equivalents

    153,416     203,235     356,651  

Other assets

    175,606     (22,493 )   153,113  
               

Total assets

  $ 2,840,216   $ (178,614 ) $ 2,661,602  
               

Debt

  $ 1,593,867   $ (167,914 )   1,425,953  

Other liabilities

    45,084         45,084  
               

Total liabilities

    1,638,951     (167,914 )   1,471,037  
               

Net assets

    1,201,265     (10,700 )   1,190,565  
               

Total liabilities and net assets

  $ 2,840,216   $ (178,614 ) $ 2,661,602  
               

(1)
Primarily the result of sales of certain investments and receivables for Allied Capital subsequent to September 30, 2009 and the use of a portion of the proceeds by Allied Capital to repay outstanding borrowings. Included within the $359.4 million of sales of investments is the sale of the investment in the SL Fund, on October 30, 2009, from Allied Capital to Ares Capital for approximately $165 million. Also included is the sale of Allied Capital's investment in Ivy Hill SDF to IHAM, a portfolio company of Ares Capital, on December 29, 2009 for approximately $33 million.

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B.
To reflect the acquisition of Allied Capital by the issuance of approximately 58.3 million shares of Ares Capital common stock. Below reflects the allocation of the purchase price on the basis of Ares Capital's current estimate of the fair value of assets to be acquired and liabilities to be assumed:

              Components of purchase price:

 
  Adjusted Allied
Capital
September 30, 2009
  Pro Forma
Adjustments
  Pro Forma  

Common stock issued

  $ 826,589   $   $ 826,589  

Payment of "in-the-money" Allied Capital stock options(4)

    35,871         35,871  
                 

Total purchase price

  $ 862,460         $ 862,460  
                 

Assets acquired:

                   

Investments

  $ 2,151,838   $ (258,326 )(1) $ 1,893,512  

Cash and cash equivalents

    356,651     (320,779 )(2)(3)   35,872  

Other assets

    153,113     (29,874 )(1)   123,239  
               

Total assets acquired

    2,661,602     (608,979 )   2,052,623  
               

Debt and other liabilities assumed

    (1,471,037 )   484,931   (1)(2)(3)   (986,106 )
               

Net assets acquired

    1,190,565     (124,048 )(1)(2)   1,066,517  
               

Gain on acquisition of Allied Capital

    (328,105 )   124,048     (204,057 )
               
 

Total

  $ 862,460   $   $ 862,460  
               

(1)
Primarily to reflect the allocation of purchase price to Allied Capital's assets and liabilities based on Ares Capital's current estimates of fair value. There is no single approach for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process. There were also adjustments made of $229.3 million and $29.9 million to Allied Capital's debt and other assets, respectively, to mark them to fair value. Allied Capital's debt is currently carried at amortized cost. The adjustment to other assets was primarily an adjustment to Allied Capital's capitalized debt costs, which are included in other assets and are also currently carried at amortized cost.

(2)
In addition to the net effect of the fair value adjustments to Allied Capital's assets and liabilities, the net assets of Allied Capital were decreased for various transaction costs expected to be incurred by Allied Capital related to the merger of approximately $49.7 million, including $32.5 million of other liabilities expected to be paid within 12 months following the Allied Acquisition.

(3)
Excess available cash of $303.5 million from the Allied Capital transaction is assumed to be used to paydown certain outstanding Allied Capital debt, which net of original issue discount recorded on the debt will reduce debt by $288.1 million.

(4)
Holders of any "in-the-money" Allied Capital stock options have the right to either receive cash or stock. For the purposes of the pro forma condensed consolidated financial statements it is assumed that the options will be paid in cash. The amount does not include the effect of options for 588,336 shares of Allied common stock that have been exercised since September 30, 2009.

79


C.
The net assets of the pro forma combined company were decreased for various transaction costs expected to be incurred by Ares Capital related to the merger of approximately $16.3 million as well as the assumed cash payment of $36 million of the "in-the-money" Allied Capital stock options.

D.
The purchase price of certain investments in debt securities being acquired from Allied Capital is estimated by Ares Capital to be less than the expected recovery value of such investments. In accordance with GAAP, subsequent to the effective time, Ares Capital will record the accretion to the expected recovery value in interest income over the remaining term of the investment. Interest income has not been adjusted to reflect the accretion to the expected recovery value for the periods presented. The accretion for the first 12 months after the effective time is estimated to be approximately $30 million. However, there can be no assurance that such accretion will be more or less than such estimate.

E.
The fair value of the outstanding debt assumed from Allied Capital is estimated by Ares Capital to be below the face amount of such debt. In accordance with GAAP, subsequent to the effective time, Ares Capital will record accretion to the face amount in interest expense over the remaining term of the debt. Interest expense has not been adjusted to reflect the accretion to the face value for the periods presented. The accretion for the first 12 months after the effective time is estimated to be approximately $67 million. However, there can be no assurance that such accretion will be more or less than such estimate.

F.
Base management fees were computed based on 1.5% of average total assets other than cash and cash equivalents but including assets purchased with borrowed funds per Ares Capital's investment advisory and management agreement with Ares Capital Management.

G.
Incentive management fees were recomputed based on the formula in Ares Capital's investment advisory and management agreement with Ares Capital Management.

H.
Adjustments to other expenses were made to reflect compensation costs for Allied Capital's employees that would have been covered by the base management fees paid to Ares Capital Management and therefore not incurred by Ares Capital. Additionally, all stock option costs were excluded as such costs would not exist at Ares Capital as there is no stock option plan maintained by Ares Capital. Payments of stock option costs to employees would have been similarly incurred by Ares Capital in the form of incentive management fees paid to Ares Capital Management. Lastly, any actual costs incurred related to the Allied Acquisition and subsequent combination, primarily various transaction costs, were also excluded.

I.
Total shares outstanding as of September 30, 2009 have been adjusted to reflect the following:

Ares Capital shares outstanding as of September 30, 2009

    109,592,728  

Estimated shares issued in connection with the merger reflected as outstanding for the periods presented

    58,292,577  
       

Ares Capital adjusted shares outstanding as of September 30, 2009

    167,885,305  
       

 
  For the Nine
Months Ended
September 30, 2009
  For the
Year Ended
December 31, 2008
 

Ares Capital weighted average shares outstanding

    99,066,652     89,666,243  

Estimated shares issued in connection with the merger reflected as outstanding for the periods presented

    58,292,577     58,292,577  
           

Ares Capital adjusted weighted average shares outstanding

    157,359,229     147,958,820  
           

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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 objective and strategies and market conditions. We also expect to use the net proceeds of an offering to repay or repurchase outstanding indebtedness, including indebtedness under (a) the Revolving Credit Facility ($490.7 million outstanding as of January 22, 2010), (b) the CP Funding Facility ($209.0 million outstanding as of January 22, 2010) and (c) the CLO Notes under the Debt Securitization (as defined below) ($273.8 million of CLO Notes outstanding as of January 22, 2010). The interest charged on the indebtedness incurred under the Revolving Credit Facility is based on LIBOR (one, two, three or six month) plus an applicable spread of between 2.50% and 4.00%. As of January 15, 2010, the one, two, three and six month LIBOR were 0.23%, 0.24%, 0.25% and 0.39%, respectively, and the effective LIBOR spread was 3.00%. The Revolving Credit Facility expires on January 22, 2013. Subject to certain exceptions, the interest charged on the CP Funding Facility is based on LIBOR plus an applicable spread of between 2.25% and 3.75% or on a "base rate" (which is the higher of a prime rate, or the federal funds rate plus 0.50%) plus an applicable spread of between 1.25% to 2.75%, in each case based on a pricing grid depending upon the credit rating of the Company. The effective LIBOR spread under the CP Funding Facility on January 22, 2010 is 2.75%. The CP Funding Facility is scheduled to expire on January 22, 2013 (subject to two one-year extension options exercisable upon mutual consent). As of January 15, 2010, the blended pricing of the CLO Notes, excluding fees, was approximately three-month LIBOR plus 27 basis points. The CLO Notes mature on December 20, 2019. The supplement to this prospectus relating to an offering may more fully identify the use of the proceeds from such offering.

              We anticipate that substantially all of the net proceeds of an offering of securities pursuant to this prospectus and its related prospectus supplement will be used for the above purposes within three months of any such offering, depending on the availability of appropriate investment opportunities consistent with our investment objective and strategies and market conditions, but no longer than within six months of any such offerings.

              Our primary focus is to generate current income and capital appreciation through investments in first and second lien senior loans and mezzanine debt, and, to a lesser extent, equity securities of eligible portfolio companies. In addition to such investments, we may invest up to 30% of our portfolio in opportunistic investments of non-eligible portfolio companies. As part of this 30%, we may invest in debt of middle-market companies located outside of the United States. Pending such investments, we will invest a portion of the net proceeds primarily in cash, cash equivalents, U.S. government securities and other high-quality short-term investments. These securities may earn yields substantially lower than the income that we anticipate receiving once we are fully invested in accordance with our investment objective. As a result, we may not be able to achieve our investment objective and/or pay any dividends during this period or, if we are able to do so, such dividends may be substantially lower than the dividends that we expect to pay when our portfolio is fully invested. If we do not realize yields in excess of our expenses, we may incur operating losses and the market price of our shares may decline. See "Regulation—Temporary Investments" for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objective.

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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

              Our common stock trades on The NASDAQ Global Select Market under the symbol "ARCC." Our common stock has historically traded at prices both above and below its net asset value. It is not possible to predict whether the common stock offered hereby will trade at, above, or below net asset value. See "Risk Factors—Risks Relating to Offerings Pursuant to this Prospectus—Our shares of common stock have recently traded at a discount from net asset value and may do so again in the future, which could limit our ability to raise additional equity capital."

              The following table sets forth, for each fiscal quarter during the last two fiscal years and the current fiscal year, the net asset value per share of our common stock, the range of high and low closing sales prices of our common stock, the closing sales price as a percentage of net asset value and the dividends or distributions declared by us. On January 22, 2010, the last reported closing sales price of our common stock on The NASDAQ Global Select Market was $12.77 per share, which represented a premium of approximately 14.4% to the net asset value per share reported by us as of September 30, 2009.

 
   
  Price Range   High
Sales Price
to Net Asset
Value(2)
  Low
Sales Price
to Net Asset
Value(2)
  Cash
Dividend
Per
Share(3)
 
 
  Net Asset
Value(1)
 
 
  High   Low  

Year ended December 31, 2008

                                     
 

First Quarter

  $ 15.17   $ 14.39   $ 12.14     94.9 %   80.0 % $ 0.42  
 

Second Quarter

  $ 13.67   $ 12.98   $ 10.08     95.0 %   73.7 % $ 0.42  
 

Third Quarter

  $ 12.83   $ 12.60   $ 9.30     98.2 %   72.5 % $ 0.42  
 

Fourth Quarter

  $ 11.27   $ 10.15   $ 3.77     90.1 %   33.5 % $ 0.42  

Year ending December 31, 2009

                                     
 

First Quarter

  $ 11.20   $ 7.39   $ 3.21     66.0 %   28.7 % $ 0.42  
 

Second Quarter

  $ 11.21   $ 8.31   $ 4.53     74.1 %   40.4 % $ 0.35  
 

Third Quarter

  $ 11.16   $ 11.02   $ 7.04     98.7 %   63.1 % $ 0.35  
 

Fourth Quarter

    *   $ 12.71   $ 10.21     *     *   $ 0.35  

Year ending December 31, 2010

                                     
 

First Quarter (through January 22, 2010

    *   $ 14.19   $ 12.77     *     *     (4 )

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

(2)
Calculated as the respective high or low closing sales price divided by net asset value.

(3)
Represents the dividend or distribution declared in the relevant quarter.

(4)
As of the date hereof, no dividend has been declared for this quarter.

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

              We currently intend to distribute quarterly dividends or distributions to our stockholders. Our quarterly dividends or distributions, if any, will be determined by our board of directors.

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              The following table summarizes our dividends declared to date:

Date Declared
  Record Date   Payment Date   Amount  

December 16, 2004

    December 27, 2004     January 26, 2005   $ 0.30  
                   
 

Total declared for 2004

              $ 0.30  
                   

February 23, 2005

    March 7, 2005     April 15, 2005   $ 0.30  

June 20, 2005

    June 30, 2005     July 15, 2005   $ 0.32  

September 6, 2005

    September 16, 2005     September 30, 2005   $ 0.34  

December 12, 2005

    December 22, 2005     January 16, 2006   $ 0.34  
                   
 

Total declared for 2005

              $ 1.30  
                   

February 28, 2006

    March 24, 2006     April 14, 2006   $ 0.36  

May 8, 2006

    June 15, 2006     June 30, 2006   $ 0.38  

August 9, 2006

    September 15, 2006     September 29, 2006   $ 0.40  

November 8, 2006

    December 15, 2006     December 29, 2006   $ 0.40  

November 8, 2006

    December 15, 2006     December 29, 2006   $ 0.10  
                   
 

Total declared for 2006

              $ 1.64  
                   

March 8, 2007

    March 19, 2007     March 30, 2007   $ 0.41  

May 10, 2007

    June 15, 2007     June 29, 2007   $ 0.41  

August 9, 2007

    September 14, 2007     September 28, 2007   $ 0.42  

November 8, 2007

    December 14, 2007     December 31, 2007   $ 0.42  
                   
 

Total declared for 2007

              $ 1.66  
                   

February 28, 2008

    March 17, 2008     March 31, 2008   $ 0.42  

May 8, 2008

    June 16, 2008     June 30, 2008   $ 0.42  

August 7, 2008

    September 15, 2008     September 30, 2008   $ 0.42  

November 6, 2008

    December 15, 2008     January 2, 2009   $ 0.42  
                   
 

Total declared for 2008

              $ 1.68  
                   

March 2, 2009

    March 16, 2009     March 31, 2009   $ 0.42  

May 7, 2009

    June 15, 2009     June 30, 2009   $ 0.35  

August 6, 2009

    September 15, 2009     September 30, 2009   $ 0.35  

November 5, 2009

    December 15, 2009     December 31, 2009   $ 0.35  
                   
 

Total declared for 2009

              $ 1.47  
                   

              To maintain our RIC status, we must timely distribute generally an amount equal to at least 90% of our investment company taxable income out of the assets legally available for distribution for each year. To avoid certain excise taxes imposed on RICs, we are generally required to distribute during each calendar year an amount at least equal to the sum of (a) 98% of our ordinary income for the calendar year, plus (b) 98% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, plus (c) any ordinary income and capital gains for preceding years that were not distributed during such years. If this requirement is not met, we will be required to pay a nondeductible excise tax equal to 4% of the amount by which 98% of the current year's taxable income exceeds the distribution for the year. The taxable income on which an excise tax is paid is generally carried forward and distributed to stockholders in the next tax year. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, as required. Our excise tax benefit for the nine months ended September 30, 2009 was approximately $30,000 and $100,000 for the year ended December 31, 2008. We cannot assure you that we will achieve results that will permit the payment of any cash distributions.

              We maintain an "opt out" dividend reinvestment plan for our common stockholders. As a result, if we declare a cash dividend, then stockholders' cash dividends will be automatically reinvested in additional shares of our common stock unless they specifically "opt out" of the dividend reinvestment plan so as to receive cash dividends. See "Dividend Reinvestment Plan."

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RATIOS OF EARNINGS TO FIXED CHARGES

              For the nine months ended September 30, 2009, the years ended December 31, 2008, 2007, 2006 and 2005, and the period June 23, 2004 (inception) through December 31, 2004, the ratios of earnings to fixed charges of the Company, computed as set forth below, were as follows:

 
  For the Nine
Months Ended
September 30,
2009
  For the
Year Ended
December 31,
2008
  For the
Year Ended
December 31,
2007
  For the
Year Ended
December 31,
2006
  For the
Year Ended
December 31,
2005
  For the
Period June 23,
2004
(inception)
Through
December 31,
2004
 

Earnings to Fixed Charges(1)

    8.2     (2.8 )   3.4     5.0     28.5     24.2  

              For purposes of computing the ratios of earnings to fixed charges, earnings represent net increase in stockholders' equity resulting from operations plus (or minus) income tax expense including excise tax expense plus fixed charges. Fixed charges include interest and credit facility fees expense and amortization of debt issuance costs.

(1)
Earnings include the net change in unrealized appreciation or depreciation. Net change in unrealized appreciation or depreciation can vary substantially from year to year. Excluding the net change in unrealized appreciation or depreciation, the earnings to fixed charges ratio would be 7.3 for the nine months ended September 30, 2009, 4.5 for the year ended December 31, 2008, 3.7 for the year ended December 31, 2007, 5.8 for the year ended December 31, 2006, 25.6 for the year ended December 31, 2005 and 22.5 for the period June 23, 2004 (inception) through December 31, 2004.

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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 Condensed Consolidated Financial Data of Ares Capital," the "Unaudited Selected Pro Forma Condensed Consolidated Financial Data," the "Unaudited Pro Forma Condensed Consolidated Financial Statements" and our and Allied Capital's financial statements and notes thereto appearing elsewhere in this prospectus or the accompanying prospectus supplement.

              We cannot assure you that the Allied Acquisition will be consummated as scheduled, or at all. See "Pending Allied Acquisition" for a description of the terms of the Allied Acquisition, "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" for a description of the risks associated with a failure to consummate the Allied Acquisition and "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition" for a description of the risks that the combined company may face if the Allied Acquisition is consummated.

OVERVIEW

              We are a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland. We have elected to be regulated as a BDC under the Investment Company Act. We were founded on April 16, 2004 and were initially funded on June 23, 2004 and on October 8, 2004 completed our initial public offering.

              Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component like warrants. To a lesser extent we make equity investments.

              We are externally managed by Ares Capital Management, an affiliate of Ares Management, a global alternative asset manager and an SEC registered investment adviser, pursuant to the investment advisory and management agreement. Ares Operations, an affiliate of Ares Management, provides the administrative services necessary for us to operate.

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

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

CRITICAL ACCOUNTING POLICIES

Basis of Presentation

              The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States, and include the accounts of the Company and its wholly owned subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are

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necessary for the fair presentation of the results of the operations and financial condition as of and for the periods presented. All significant intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents

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

Concentration of Credit Risk

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

Investments

              Investment transactions are recorded on the trade date. Realized gains or losses are computed using the specific identification method. Investments for which market quotations are readily available are typically valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available (i.e., substantially all of our investments) are valued at fair value as determined in good faith by our board of directors, based on the input of our management and audit committee and independent valuation firms that have been engaged at the direction of the board to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing 12-month period and under a valuation policy and consistently applied valuation process. The valuation process is conducted at the end of each fiscal quarter, with approximately 50% (based on value) of our valuations of portfolio companies without readily available market quotations subject to review by an independent valuation firm each quarter.

              As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company's debt and equity), the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company's securities to publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation.

              Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors, based on the input of our management and audit committee and independent valuation firms under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which we have recorded it.

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              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 would be realized based on the valuations currently assigned. See "Risk Factors—Risks Relating to Our Investments—Price declines and illiquidity in the corporate debt markets have adversely affected, and may in the future adversely affect, the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation."

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

              Effective January 1, 2008, the Company adopted ASC 820-10 (previously SFAS No. 157, Fair Value Measurements ("SFAS 157")), which expands the application of fair value accounting for investments (see Note 8 to the consolidated financial statements for the period ended September 30, 2009).

Interest Income Recognition

              Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Discounts and premiums on securities purchased are accreted/amortized over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums.

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

Payment-in-Kind Interest

              The Company has loans in its portfolio that contain payment-in-kind ("PIK") provisions. 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.

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Capital Structuring Service Fees and Other Income

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

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

Foreign Currency Translation

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

              Results of operations based on changes in foreign exchange rates are separately disclosed in the statement of operations. Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. government securities. These risks include, but are not limited to, currency fluctuation and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices more volatile than those of comparable U.S. companies or U.S. government securities.

Accounting for Derivative Instruments

              We do not utilize hedge accounting and marks its derivatives to market through operations.

Offering Expenses

              Our offering costs are charged against the proceeds from equity offerings when received.

Debt Issuance Costs

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

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U.S. Federal Income Taxes

              We have elected to be treated as a RIC under Subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, we are required to timely distribute to our stockholders generally at least 90% of "investment company taxable income," as defined by the Code, for each year. We have made and intend to continue to make the requisite distributions to our stockholders, which will generally relieve us from U.S. federal income tax liability.

              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% U.S. federal excise tax on such income, as required. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions, we accrue this excise tax, if any, on estimated excess taxable income as taxable income is earned.

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

Dividends

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

              We have adopted a dividend reinvestment plan that provides for reinvestment of any distributions we declare in cash on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not "opted out" of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving the cash dividend. While we generally use primarily newly issued shares to implement the dividend reinvestment plan (especially if our shares are trading at a premium to net asset value), we may purchase shares in the open market in connection with our obligations under the dividend reinvestment plan. In particular, if our shares are trading at a significant enough discount to net asset value and we are otherwise permitted under applicable law to purchase such shares, we intend to purchase shares in the open market in connection with our obligations under our dividend reinvestment plan.

Use of Estimates in the Preparation of Financial Statements

              The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of actual and contingent assets and liabilities at the date of the financial statements and the reported amounts of income or loss and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation of investments.

New Accounting Pronouncements

              In June 2009, the Financial Accounting Standards Board ("FASB") issued ASC 860 (previously SFAS No. 166, Accounting for Transfer of Financial Assets, which amends the guidance in SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities). ASC 860 eliminates the qualifying special-purpose entities ("QSPEs") concept, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the derecognition criteria,

89



revises how retained interests are initially measured, and removes the guaranteed mortgage securitization recharacterization provisions. ASC 860 requires additional year-end and interim disclosures for public and nonpublic companies that are similar to the disclosures required by FSP FAS 140-4 and FIN 46(R)-8. ASC 860 is effective as of the beginning of a company's first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. ASC 860's disclosure requirements must be applied to transfers that occurred before and after its effective date. Early adoption is prohibited. We are currently evaluating the effect that the provisions of ASC 860 may have on our financial condition and results of operations.

              In June 2009, FASB issued ASC 810 (previously SFAS No. 167, Amendments to FASB Interpretation No. 46(R), which amends the guidance in FASB Interpretation No. ("FIN") 46(R), Consolidation of Variable Interest Entities). ASC 810 requires reporting entities to evaluate former QSPEs for consolidation, changes the approach to determining the primary beneficiary of a variable interest entity (a "VIE") from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. ASC 810 also clarifies, but does not significantly change, the characteristics that identify a VIE. ASC 810 requires additional year-end and interim disclosures for public and non-public companies that are similar to the disclosures required by FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. ASC 810 is effective as of the beginning of a company's first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. All QSPEs and entities currently subject to FIN 46(R) will need to be reevaluated under the amended consolidation requirements as of the beginning of the first annual reporting period that begins after November 15, 2009. Early adoption is prohibited. We are currently evaluating the effect that the provisions of ASC 810 may have on our financial condition and results of operations.

              In June 2009, FASB issued ASC 2005, (previously SFAS NO. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP")—a replacement of FASB Statement No. 162 ("Codification")). This Codification will become the source of authoritative U.S. GAAP recognized by FASB to be applied by nongovernmental entities. Once the Codification is in effect, all of its content will carry the same level of authority, effectively superseding SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. In other words, the GAAP hierarchy will be modified to include only two levels of GAAP: authoritative and nonauthoritative. The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In order to ease the transition to the Codification, the Company has provided the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification.

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PORTFOLIO AND INVESTMENT ACTIVITY
(in millions, except number of new investment commitments, terms and percentages)

 
  Nine Months Ended
September 30,
  Year Ended December 31,  
 
  2009   2008   2008   2007   2006  

New investment commitments(1):

                               
 

New portfolio companies

  $ 11.7   $ 556.0   $ 600.5   $ 1,091.6   $ 812.5  
 

Existing portfolio companies

    123.7     273.6     305.0     256.0     297.5  
                       
 

Total new investment commitments

    135.4     829.6     905.5     1,347.6     1,110.0  

Less:

                               
 

Investment commitments exited

    270.7     354.9     430.3     654.1     404.9  
                       
 

Net investment commitments

  $ (135.3 ) $ 474.7   $ 475.2   $ 693.5   $ 705.1  

Principal amount of investments purchased:

                               
 

Senior term debt

  $ 164.8   $ 463.8   $ 529.2   $ 886.7   $ 726.4  
 

Senior subordinated debt

    31.6     295.8     336.3     187.1     249.4  
 

Equity and other

    23.7     55.1     60.4     177.6     111.7  
                       
 

Total

  $ 220.1   $ 814.7   $ 925.9   $ 1,251.4   $ 1,087.5  

Principal amount of investments sold or repaid:

                               
 

Senior term debt

  $ 170.6   $ 359.7   $ 448.8   $ 608.3   $ 255.5  
 

Senior subordinated debt

    82.0     19.5     29.0     89.8     99.2  
 

Equity and other

    19.1     7.4     7.4     20.6     75.3  
                       
 

Total

  $ 271.7   $ 386.6   $ 485.2   $ 718.7   $ 430.0  

Number of new investment commitments(2)

    22     34     39     47     54  

Average new investment commitments amount

  $ 6.2   $ 24.4   $ 23.2   $ 28.7   $ 19.0  

Weighted average term for new investment commitments (in months)

    52     72     66     69     69  

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

    9.93 %   12.59 %   12.57 %   11.51 %   11.76 %

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

    10.46 %   12.59 %   12.58 %   11.53 %   11.76 %

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

    12.20 %   9.29 %   9.49 %   11.67 %   11.39 %

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

    11.62 %   9.29 %   9.79 %   11.72 %   11.95 %

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

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

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

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              The investment adviser employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, the investment adviser grades the credit status of all investments on a scale of 1 to 4 no less frequently than quarterly. This system is intended to reflect the performance of the portfolio company's business, the collateral coverage of the investment and other relevant factors. Under this system, investments with a grade of 4 involve the least amount of risk in our portfolio. This portfolio company is performing above expectations and the trends and risk factors are generally favorable, including a potential exit. Investments graded 3 involve a level of risk that is similar to the risk at the time of origination. This portfolio company is performing as expected and the risk factors are neutral to favorable. All new investments are initially assessed a grade of 3. Investments graded 2 involve a portfolio company performing below expectations and indicates that the investment's risk has increased materially since origination. This portfolio company may be out of compliance with debt covenants, however, payments are generally not more than 120 days past due. For investments graded 2, our investment adviser increases procedures to monitor the portfolio company and will write down the fair value of the investment if it is deemed to be impaired. An investment grade of 1 indicates that the portfolio company is performing materially below expectations and that the investment risk has substantially increased since origination. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Investments graded 1 are not anticipated to be repaid in full. Our investment adviser employs half-point increments to reflect underlying trends in portfolio company operating or financial performance, as well as the general outlook. As of September 30, 2009, the weighted average investment grade of the investments in our portfolio was 3.0 with 5.3% of total investments at amortized cost (or 1.7% at fair value) on non-accrual status. The weighted average investment grade of the investments in our portfolio as of December 31, 2008 was 2.9. The distribution of the grades of our portfolio companies as of September 30, 2009 and December 31, 2008 is as follows (dollar amounts in thousands):

 
  September 30, 2009   December 31, 2008  
 
  Fair
Value
  Number of
Companies
  Fair
Value
  Number of
Companies
 

Grade 1

  $ 20,022     9   $ 48,192     8  

Grade 2

    152,485     10     180,527     9  

Grade 3

    1,683,634     67     1,632,136     68  

Grade 4

    111,583     8     112,122     6  
                   

  $ 1,967,724     94   $ 1,972,977     91  
                   

              The weighted average yields of the following portions of our portfolio as of September 30, 2009 and December 31, 2008 were as follows:

 
  September 30, 2009   December 31, 2008  
 
  Fair
Value
  Amortized
Cost
  Fair
Value
  Amortized
Cost
 

Debt and income producing securities

    12.53 %   11.70 %   12.79 %   11.73 %

Total portfolio

    10.95 %   9.60 %   11.24 %   9.78 %

Senior term debt

    11.42 %   10.74 %   12.01 %   10.85 %

Senior subordinated debt

    14.94 %   13.64 %   14.78 %   13.69 %

Income producing equity securities

    10.19 %   10.89 %   8.42 %   9.30 %

First lien senior term debt

    9.94 %   9.63 %   10.80 %   9.99 %

Second lien senior term debt

    13.75 %   12.41 %   13.75 %   12.04 %

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RESULTS OF OPERATIONS

For the three and nine months ended September 30, 2009 and 2008

              Operating results for the three and nine ended September 30, 2009 and 2008 are as follows (in thousands):

 
  For the three months ended   For the nine months ended  
 
  September 30,
2009
  September 30,
2008
  September 30,
2009
  September 30,
2008
 

Total investment income

  $ 60,881   $ 62,067   $ 176,008   $ 177,738  

Total expenses

    27,521     29,365     80,391     83,186  
                   

Net investment income before income taxes

    33,360     32,702     95,617     94,552  

Income tax expense (benefit), including excise tax

    454     (118 )   563     (302 )
                   

Net investment income

    32,906     32,820     95,054     94,854  

Net realized gains (losses)

    (1,656 )   4,580     22,311     4,796  

Net unrealized gains (losses)

    32,026     (78,793 )   15,698     (128,605 )
                   
 

Net increase in stockholders' equity resulting from operations

  $ 63,276   $ (41,393 ) $ 133,063   $ (28,955 )
                   

              Net income can vary substantially from period to period for various factors, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, quarterly comparisons of net income may not be meaningful.

Investment Income

              For the three months ended September 30, 2009, total investment income decreased $1.2 million, or 2%, over the three months ended September 30, 2008. For the three months ended September 30, 2009, total investment income consisted of $56.9 million in interest income from investments, $2.2 million in dividend income and $1.6 million in other income. There were no capital structuring service fees for the three months ended September 30, 2009 compared to $3.3 million for the same period in 2008. The decrease in capital structuring service fees was primarily due to the significant decrease in new investment commitments for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008. Dividend income increased $1.4 million or 186% to $2.2 million for the three months ended September 30, 2009 from $0.8 million for the comparable period in 2008 primarily due to the dividend from IHAM as a result of treating IHAM as a portfolio company (see Note 10 to the consolidated financial statements for the nine months ended September 30, 2009). Additionally, other income increased $0.9 million or 120% to $1.6 million for the three months ended September 30, 2009 from $0.7 million for the comparable period in 2008 primarily due to miscellaneous amendment fees received during the period.

              For the nine months ended September 30, 2009, total investment income decreased $1.7 million, or 1%, over the nine months ended September 30, 2008. For the nine months ended September 30, 2009, total investment income consisted of $163.2 million in interest income from investments, $1.8 million in capital structuring service fees, $3.4 million in dividend income, $4.4 million in other income and $2.7 million in management fees. Capital structuring service fees decreased $16.7 million, or 90%, to $1.8 million for the nine months ended September 30, 2009 from $18.6 million for the comparable period in 2008. The decrease in capital structuring service fees was primarily due to the decrease in new investment commitments for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. Interest income from investments increased $11.3 million, or 7%, to $163.2 million for the nine months ended September 30,

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2009 from $151.9 million for the comparable period in 2008. The increase in interest income from investments was primarily due to the increase in the size of the portfolio. The average investments, at amortized cost, for the period increased from $2.2 billion for the nine months ended September 30, 2008 to $2.3 billion for the comparable period in 2009. Other income increased $2.0 million or 82% to $4.4 million for the nine months ended September 30, 2009 from $2.4 million for the comparable period in 2008, primarily due to miscellaneous amendment fees received during the period. Dividend income increased $1.5 million or 77% to $3.4 million for the nine months ended September 30, 2009 from $1.9 million for the comparable period in 2008, primarily due to the dividend from IHAM.

Operating Expenses

              For the three months ended September 30, 2009, total expenses decreased $1.8 million, or 6%, over the three months ended September 30, 2008. Interest expense and credit facility fees decreased $3.8 million, or 40%, to $5.7 million for the three months ended September 30, 2009 from $9.5 million for the comparable period in 2008, primarily due to the lower average cost of debt. The average cost of debt for the three months ended September 30, 2009 was 2.16% compared to the average cost of debt of 3.74% for the comparable period in 2008 due to the significant decrease in LIBOR over the period. There were $831 million in average outstanding borrowings during the three months ended September 30, 2009 compared to average outstanding borrowings of $883 million in the comparable period in 2008. For the three months ended September 30, 2009, the Company incurred $2.0 million in professional fees related to the Allied Acquisition that were not incurred in the comparable period in 2008.

              For the nine months ended September 30, 2009, total expenses decreased $2.8 million, or 3%, over the nine months ended September 30, 2008. Interest expense and credit facility fees decreased $8.0 million, or 30%, to $18.6 million for the nine months ended September 30, 2009 from $26.6 million for the comparable period in 2008, primarily due to the lower average cost of debt. The average cost of debt for the nine months ended September 30, 2009 was 2.21% compared to the average cost of debt of 3.71% for the comparable period in 2008 due to the significant decrease in LIBOR over the period offset by a higher spread for the CP Funding Facility. There were $865 million in average outstanding borrowings during the nine months ended September 30, 2009 compared to average outstanding borrowings of $794 million in the comparable period in 2008. The decrease in total expenses was partially offset by the increase in administrative expense, which increased $1.2 million, or 71%, to $2.9 million for the nine months ended September 30, 2009 from $1.7 million for the comparable period in 2008. This increase was primarily due to the expenses incurred by IHAM pursuant to a separate services agreement with Ares Capital Management. There was no such agreement in place in the comparable period in 2008. Additionally, professional fees increased $1.4 million, or 32%, to $5.7 million for the nine months ended September 30, 2009 from $4.4 million for the comparable period in 2008. This increase was primarily due to a rise in legal and valuation costs. For the three months ended September 30, 2009, the Company incurred $2.0 million in professional fees related to the Allied Acquisition that were not incurred in the comparable period in 2008.

Income Tax Expense, Including Excise Tax

              We have elected to be treated as a RIC under Subchapter M of the Code and operate in a manner so as to qualify for the U.S. federal income tax treatment applicable to RICs. Among other things, we have, in order to maintain our RIC status, made and intend to continue to make the requisite distributions to our stockholders, which will generally relieve us from U.S. federal income tax liability.

              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

94



4% U.S. federal excise tax on such income, as required. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions, we accrue this excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three months ended September 30, 2009, we recorded no amounts for U.S. federal excise tax. For the nine months ended September 30, 2009, we recognized $0.1 million of benefits for U.S. federal excise tax. For the three months ended September 30, 2008, we recorded a $0.1 million provision for U.S. federal excise tax. For the nine months ended September 30, 2008, we recorded a benefit of $0.4 million for U.S. federal excise tax.

              Certain of our wholly owned subsidiaries are subject to U.S. federal and state income taxes and we and our subsidiaries may be subject to foreign taxes. For the three and nine months ended September 30, 2009, we recorded tax provisions of approximately $0.5 million and $0.6 million for these subsidiaries, respectively. For the three and nine months ended September 30, 2008, we recorded tax provisions of approximately $0.1 million for these subsidiaries.

Net Unrealized Gains/Losses

              For the three months ended September 30, 2009, the Company had net unrealized gains of $32.0 million, which was primarily comprised of $17.6 million in unrealized depreciation, $45.7 million in unrealized appreciation and $3.9 million related to the reversal of prior period net unrealized depreciation. The most significant changes in net unrealized appreciation and depreciation during the three months ended September 30, 2009 were as follows (in millions):

 
  For the three months ended
September 30, 2009
 
Portfolio Company
  Unrealized
Appreciation
(Depreciation)
 

ADF Restaurant Group, LLC

  $ 5.1  

Imperial Capital Group, LLC

    5.0  

Wear Me Apparel, LLC

    4.8  

CT Technologies Holdings, LLC

    2.8  

Apple & Eve, LLC

    2.3  

OTG Management, Inc. 

    1.8  

Best Brands Corporation

    1.8  

Capella Healthcare, Inc. 

    1.7  

Bumble Bee Foods, LLC

    1.7  

Prommis Solutions, LLC

    1.6  

National Print Group, Inc. 

    1.6  

Instituto de Banca y Comercio, Inc. 

    1.5  

The Teaching Company, LLC

    1.4  

Pillar Holdings LLC

    1.0  

3091779 Nova Scotia Inc. 

    (1.1 )

Wastequip, Inc. 

    (1.3 )

AWTP, LLC

    (1.4 )

MPBP Holdings, Inc. 

    (1.9 )

LVCG Holdings LLC

    (2.0 )

Canon Communications LLC

    (2.2 )

R3 Education, Inc. 

    (3.5 )

Other

    7.4  
       
 

Total

  $ 28.1  
       

95


              For the three months ended September 30, 2008, the Company had net unrealized losses of $78.8 million, which primarily consisted of $88.3 million of unrealized depreciation from investments less $10.3 million of unrealized appreciation from investments. The most significant changes in net unrealized appreciation and depreciation during the three months ended September 30, 2008 were as follows (in millions):

 
  For the three months ended
September 30, 2008
 
Portfolio Company
  Unrealized
Appreciation
(Depreciation)
 

Waste Pro USA, Inc. 

  $ 2.8  

Hudson Group, Inc. 

    2.8  

Industrial Container Services, LLC

    1.6  

MPBP Holdings, Inc. 

    (3.2 )

HB&G Building Products

    (3.2 )

Apple & Eve, LLC

    (3.6 )

Reflexite Corporation

    (4.0 )

Things Remembered

    (4.0 )

Capella Healthcare, Inc. 

    (4.8 )

Wear Me Apparel, LLC

    (6.8 )

Best Brands Corporation

    (7.4 )

Courtside Acquisition Corp. 

    (8.6 )

FirstLight Financial Corporation

    (10.0 )

DSI Renal, Inc. 

    (10.0 )

Other

    (20.4 )
       
 

Total

  $ (78.8 )
       

              For the nine months ended September 30, 2009, the Company had net unrealized gains of $15.7 million, which was primarily comprised of $81.4 million in unrealized depreciation and $91.8 million in unrealized appreciation and $5.3 million relating to the reversal of prior period net

96



unrealized depreciation. The most significant changes in net unrealized appreciation and depreciation during the nine months ended September 30, 2009 were as follows (in millions):

 
  For the nine months ended
September 30, 2009
 
Portfolio Company
  Unrealized
Appreciation
(Depreciation)
 

Apple & Eve, LLC

  $ 10.5  

Best Brands Corp. 

    8.2  

Ivy Hill Asset Management, L.P.(1)

    8.0  

Capella Healthcare, Inc. 

    6.0  

Wear Me Apparel, LLC

    6.0  

Imperial Capital Group, LLC

    5.0  

ADF Restaurant Group

    4.9  

Waste Pro USA, Inc. 

    4.2  

Prommis Solutions, LLC

    3.8  

Booz Allen Hamilton, Inc. 

    3.5  

DSI Renal, Inc. 

    2.8  

Instituto de Banca y Comercio, Inc. 

    2.7  

CT Technologies Holdings, LLC

    2.4  

Lakeland Finance, LLC

    2.0  

Pillar Holdings LLC

    2.0  

Bumble Bee Foods, LLC

    1.7  

Wyle Laboratories, Inc. 

    1.4  

Savers, Inc. 

    1.4  

Magnacare Holdings, Inc. 

    1.4  

The Teaching Company, LLC

    1.3  

Encanto Restaurants, Inc. 

    1.2  

American Residential Services, LLC

    1.2  

Hudson Group, Inc. 

    1.2  

Diversified Collections Services, Inc. 

    1.0  

Industrial Container Services, LLC

    (1.3 )

Planet Organic Health Corp. 

    (1.3 )

Things Remembered, Inc. 

    (1.8 )

HB&G Building Products

    (1.8 )

Sigma International Group, Inc. 

    (2.6 )

Canon Communications LLC

    (2.6 )

VOTC Acquisition Corp. 

    (2.8 )

National Print Group, Inc. 

    (2.8 )

MPBP Holdings, Inc. 

    (3.2 )

Growing Family, Inc. 

    (3.4 )

R3 Education, Inc. 

    (3.4 )

Courtside Acquisition Corp. 

    (3.4 )

Wastequip, Inc. 

    (4.0 )

AWTP, LLC

    (4.1 )

Direct Buy Holdings, Inc. 

    (4.2 )

Summit Business Media, LLC

    (4.7 )

LVCG Holdings LLC

    (6.5 )

Reflexite Corporation

    (10.6 )

FirstLight Financial Corporation

    (11.0 )

Other

    2.1  
       
 

Total

  $ 10.4  
       

(1)
See Note 10 to the consolidated financial statements for the nine months ended September 30, 2009.

97


              For the nine months ended September 30, 2008, the Company had net unrealized losses of $128.6 million, which primarily consisted of $167.3 million of unrealized depreciation from investments less $39.6 million of unrealized appreciation from investments. The most significant changes in net unrealized appreciation and depreciation during the three months ended September 30, 2008 were as follows (in millions):

 
  For the nine months ended
September 30, 2008
 
Portfolio Company
  Unrealized
Appreciation
(Depreciation)
 

Reflexite Corporation

  $ 7.3  

R3 Education, Inc. 

    5.0  

Industrial Container Services, LLC

    2.9  

WastePro USA, Inc. 

    2.8  

Hudson Group, Inc. 

    2.8  

Instituto de Banca y Comercio, Inc. 

    2.7  

Capella Healthcare, Inc. 

    (4.8 )

HB&G Building Products

    (5.2 )

Apple & Eve, LLC

    (5.9 )

Primis Holdings, LLC

    (6.0 )

Best Brands Corporation

    (7.4 )

Making Memories Wholesale, Inc. 

    (8.2 )

DSI Renal, Inc. 

    (10.2 )

MPBP Holdings, Inc. 

    (10.5 )

Wear Me Apparel, LLC

    (11.2 )

Reflexite Corporation

    (14.0 )

FirstLight Financial Corporation

    (15.0 )

Courtside Acquisition Corp. 

    (25.7 )

Other

    (28.0 )
       
 

Total

  $ (128.6 )
       

Net Realized Gains/Losses

              During the three months ended September 30, 2009, the Company had $104.4 million of sales and repayments resulting in $1.7 million of net realized losses. These sales and repayments included $5.0 million of loans sold to the Ivy Hill Funds, the two middle market credit funds managed by our portfolio company, IHAM (see Note 10 to the consolidated financial statements for the nine months ended September 30, 2009 for more detail on IHAM and the Ivy Hill Funds). Net realized losses on investments were comprised of $12.8 million of gross realized gains and $14.5 million of gross realized losses. The most significant realized gains and losses on investments for the three months ended September 30, 2009 were as follows (in millions):

Portfolio Company
  Realized
Gain (Loss)
 

WastePro USA, Inc. 

  $ 12.3  

Making Memories Wholesale, Inc. 

    (14.2 )

Other

    0.2  
       
 

Total

  $ (1.7 )
       

98


              During the three months ended September 30, 2008, the Company had $168.0 million of sales and repayments resulting in $4.6 million of net realized gains. The most significant realized gains on investments for the three months ended September 30, 2008 were as follows (in millions):

Portfolio Company
  Realized
Gain (Loss)
 

Daily Candy, Inc. 

  $ 2.5  

Waste Pro USA, Inc. 

    2.0  

Other

    0.1  
       
 

Total

  $ 4.6  
       

              During the nine months ended September 30, 2009, the Company repurchased $34.8 million of CLO Notes (as defined below) resulting in a $26.5 million realized gain on the extinguishment of debt. The Company also had $267.4 million of sales and repayments resulting in $4.2 million of net realized losses. These sales and repayments included $45.5 million of loans sold to the Ivy Hill Funds. Net realized losses on investments were comprised of $13.0 million of gross realized gains and $17.2 million of gross realized losses. The most significant realized gains and losses on investments for the nine months ended September 30, 2009 were as follows (in millions):

Portfolio Company
  Realized
Gain (Loss)
 

WastePro USA, Inc. 

  $ 12.3  

Capella Healthcare, Inc. 

    (1.0 )

Instituto de Banca y Commercio, Inc. 

    (1.2 )

Making Memories Wholesale, Inc. 

    (14.2 )

Other

    (0.1 )
       
 

Total

  $ (4.2 )
       

              During the nine months ended September 30, 2008, the Company had $393.6 million of sales and repayments resulting in $4.8 million of net realized gains.

Portfolio Company
  Realized
Gain (Loss)
 

Daily Candy, Inc. 

  $ 2.5  

Waste Pro USA, Inc. 

    2.0  

Other

    0.3  
       
 

Total

  $ 4.8  
       

99


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

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

 
  For the year ended December 31,  
 
  2008   2007   2006  

Total Investment Income

  $ 240,461   $ 188,873   $ 120,021  

Total Expenses

    113,221     94,750     58,458  
               

Net Investment Income Before Income Taxes

    127,240     94,123     61,563  

Income Tax Expense (Benefit), Including Excise Tax

    248     (826 )   4,931  
               
 

Net Investment Income

    126,992     94,949     56,632  

Net Realized Gains

    6,371     6,544     27,616  

Net Unrealized Losses

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

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

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

Investment Income

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

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

Operating Expenses

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

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

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

Income Tax Expense, Including Excise Tax

              For the years ended December 31, 2008, 2007 and 2006 provisions of approximately $0.1 million, $0.1 million and $0.6 million respectively, were recorded for federal excise tax.

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

Net Realized Gains/Losses

              During the year ended December 31, 2008, the Company had $495.6 million of sales and repayments resulting in $6.6 million of net realized gains. These sales and repayments included the $75.5 million of loans sold to the Ivy Hill Funds. Net realized gains were comprised of $6.8 million of

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gross realized gains and $0.2 of gross realized losses. The most significant realized gains and losses during the year ended December 31, 2008 were as follows (in millions):

Portfolio Company
  Realized
Gain (Loss)
 

Hudson Group, Inc. 

  $ 2.8  

Waste Pro USA, Inc. 

    2.0  

Daily Candy, Inc. 

    1.3  

Other

    0.5  
       
 

Total

  $ 6.6  
       

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

Portfolio Company
  Realized
Gain (Loss)
 

The GSI Group, Inc. 

  $ 6.2  

Varel Holdings, Inc. 

    4.0  

Equinox SMU Partners LLC

    3.5  

Berkline/Benchcraft Holdings LLC

    (8.8 )

Other

    1.7  
       
 

Total

  $ 6.6  
       

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

Portfolio Company
  Realized
Gain (Loss)
 

CICQ, LP

  $ 18.6  

United Site Services, Inc. 

    4.5  

GCA Services Group, Inc. 

    1.0  

Other

    3.5  
       
 

Total

  $ 27.6  
       

Net Unrealized Gains/Losses

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

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

Portfolio Company
  Unrealized
Appreciation
(Depreciation)
 

R3 Education, Inc. 

  $ 5.0  

Instituto de Banco Y Comercio, Inc. 

    4.5  

Industrial Container Services LLC

    4.1  

Diversified Collection Services, Inc. 

    3.4  

Campus Management Corp. 

    3.0  

Prommis Solutions, LLC

    (3.1 )

309179 Nova Scotia, Inc. 

    (3.1 )

National Print Group, Inc. 

    (3.1 )

Athletic Club Holdings, Inc. 

    (3.2 )

Booz Allen Hamilton, Inc. 

    (3.2 )

Wastequip, Inc. 

    (3.3 )

Direct Buy Holdings, Inc. 

    (3.6 )

OnCURE Medical Corp. 

    (3.6 )

VSS-Tranzact Holdings, LLC

    (4.0 )

Summit Business Media, LLC

    (4.0 )

Best Brands Corporation

    (4.3 )

GG Merger Sub I, Inc. 

    (4.7 )

Apogee Retail, LLC

    (4.8 )

Ivy Hill Middle Market Credit Fund, Ltd. 

    (5.6 )

Making Memories Wholesale, Inc. 

    (6.7 )

Vistar Corporation

    (6.9 )

HB&G Building Products

    (7.4 )

Growing Family, Inc. 

    (7.5 )

Primis Marketing Group, Inc. 

    (7.6 )

Capella Healthcare, Inc. 

    (9.5 )

Wear Me Apparel, LLC

    (12.1 )

Things Remembered, Inc. 

    (12.3 )

Apple & Eve, LLC

    (12.4 )

MPBP Holdings, Inc. 

    (15.3 )

DSI Renal, Inc. 

    (18.1 )

Reflexite Corporation

    (19.2 )

Courtside Acquisition Corp. 

    (30.9 )

FirstLight Financial Corporation

    (37.0 )

Other

    (32.5 )
       
 

Total

  $ (269.0 )
       

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

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

Portfolio Company
  Unrealized
Appreciation
(Depreciation)
 

Reflexite Corporation

  $ 27.2  

The GSI Group, Inc. 

    5.6  

Waste Pro, Inc. 

    4.0  

Daily Candy, Inc. 

    3.6  

Industrial Container Services, Inc. 

    3.2  

Varel Holdings, Inc. 

    3.0  

Wastequip, Inc. 

    (3.2 )

Making Memories Wholesale, Inc. 

    (5.0 )

Primis Marketing Group, Inc. 

    (5.6 )

Universal Trailer Corporation

    (7.2 )

Wear Me Apparel, LLC

    (8.0 )

FirstLight Financial Corporation

    (10.0 )

MPBP Holdings, Inc. 

    (10.5 )

Other

    (5.0 )
       
 

Total

  $ (7.9 )
       

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

Portfolio Company
  Unrealized
Appreciation
(Depreciation)
 

CICQ, LP

  $ 4.0  

Universal Trailer Corporation

    3.4  

Varel Holdings, Inc. 

    1.0  

Making Memories Wholesale, Inc. 

    (2.4 )

Berkshire/Benchcraft Holdings LLC

    (6.5 )

Other

    0.8  
       
 

Total

  $ 0.3  
       

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

              Since the Company's inception, the Company's liquidity and capital resources have been generated primarily from the net proceeds of public offerings of common stock, the Debt Securitization, advances from the Facilities, as well as cash flows from operations.

              As of September 30, 2009, the Company had $61.5 million in cash and cash equivalents and $767.9 million in total indebtedness outstanding. Subject to leverage restrictions, the Company had approximately $453.9 million available for additional borrowings under the Facilities as of September 30, 2009.

              Due to volatility in global markets, the availability of capital and access to capital markets has been limited over the last two years. We have responded to recent constraints on raising new capital by

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pursuing other avenues of liquidity and growth, such as adjusting the pace of our investments, becoming more selective in evaluating investment opportunities to ensure appropriate risk-adjusted returns, pursuing asset sales, developing our third-party asset management capabilities and/or recycling lower yielding investments. We also intend to continue pursuing opportunities to manage third-party funds. As the global liquidity situation evolves, we will continue to monitor and adjust our funding approach accordingly. However, given the unprecedented nature of the volatility in the global markets, there can be no assurances that these activities will be successful. While levels of market disruption and volatility appear to be improving, there can be no assurance that they will not worsen. If they do, we could face materially higher financing costs. Consequently, our operating strategy could be materially and adversely affected. The illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our investments.

Equity Offerings

              The following table summarizes the total shares issued and proceeds we received net of underwriter, dealer manager and offering costs for the nine months ended September 30, 2009 and 2008 (in millions, except per share data):

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

August 2009 public offering

    12.4   $ 9.25   $ 109.1  
                 
 

Total for the nine months ended September 30, 2009

    12.4         $ 109.1  

April 2008 public offering

   
24.2
 
$

11.00
 
$

259.8
 
                 
 

Total for the nine months ended September 30, 2008

    24.2         $ 259.8  

Debt Capital Activities

              Our debt obligations consisted of the following as of September 30, 2009 and December 31, 2008 (in millions):

 
  September 30, 2009   December 31, 2008  
 
  Outstanding   Total
Available(1)
  Outstanding   Total
Available(1)
 

Revolving Credit Facility

  $ 271.1   $ 525.0   $ 480.5   $ 510.0  

CP Funding Facility

    223.0     223.0     114.3     350.0  

CP Funding II Facility

        200.0          

Debt Securitization

    273.8     273.8     314.0     314.0  
                   

  $ 767.9   $ 1,221.8   $ 908.8   $ 1,174.0  
                   

(1)
Subject to borrowing base and leverage restrictions.

              The weighted average interest rate and weighted average maturity of all our outstanding borrowings as of September 30, 2009 were 2.02% and 4.8 years, respectively. The weighted average interest rate and weighted average maturity of all our outstanding borrowings as of December 31, 2008 were 3.03% and 4.9 years, respectively.

              The ratio of total debt outstanding to stockholders' equity as of September 30, 2009 was 0.63:1.00 compared to 0.83:1.00 as of December 31, 2008.

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

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

Revolving Credit Facility

  $ 480.5   $   $ 480.5   $   $  

CP Funding Facility

    114.3     114.3              

Debt Securitization

    314.0                 314.0  
                       
 

Total Debt

  $ 908.8   $ 114.3   $ 480.5   $   $ 314.0  
                       

              In accordance with the Investment Company Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the Investment Company Act, is at least 200% after such borrowing. As of September 30, 2009, our asset coverage for borrowed amounts was 259%. As of December 31, 2008, our asset coverage for borrowed amounts was 220%.

Revolving Credit Facility

              In December 2005, we entered into a senior secured revolving credit facility, referred to as the "Revolving Credit Facility," under which, as amended as of September 31, 2009, the lenders had agreed to extend credit to the Company in an aggregate principal amount not exceeding $525 million at any one time outstanding. As of September 30, 2009, the Revolving Credit Facility was to expire on December 28, 2010 and was secured by substantially all of our assets (subject to certain exceptions, including investments held by Ares Capital CP under the CP Funding Facility, investments held by Ares Capital CP II under the CP Funding II Facility and those held as a part of the Debt Securitization, each discussed below) which as of September 30, 2009 consisted of 167 investments.

              As of September 30, 2009, the Revolving Credit Facility also included an "accordion" feature that allowed us to increase the size of the Revolving Credit Facility to a maximum of $765 million under certain circumstances. The Revolving Credit Facility also includes usual and customary events of default and covenants for senior secured revolving credit facilities of this nature and companies of this type. As of September 30, 2009, there was $271.1 million outstanding under the Revolving Credit Facility and the Company continued to be in compliance with all of the limitations and requirements of the Revolving Credit Facility. As of December 31, 2008, there was $480.5 million outstanding under the Revolving Credit Facility. See Note 7 to our consolidated financial statements for the period ended September 30, 2009 for more detail on the Revolving Credit Facility.

              On January 22, 2010, the Revolving Credit Facility was amended and restated to, among other things, increase the size of the facility from $525 million to $690 million (comprised of $615 million in commitments on a stand-alone basis and an additional $75 million in commitments contingent upon the closing of the merger), extend the maturity date to January 22, 2013 and modified pricing. Subject to certain exceptions, pricing under the Revolving Credit Facility as amended as of the date of this document is based on LIBOR plus an applicable spread of between 2.50% and 4.00% or an "alternate base rate" (which is the highest of a prime rate, the federal funds rate plus 0.50% or one month LIBOR plus 1.00%) plus an applicable spread of between 1.50% and 3.00%, in each case based on a pricing grid depending on Ares Capital's credit rating. The effective LIBOR spread under the Revolving Credit Facility on January 22, 2010 was 3.00%. The Revolving Credit Facility continues to be secured by substantially all of Ares Capital's assets (subject to certain exceptions, including investments held by Ares Capital CP under the CP Funding Facility and those held as a part of the Debt Securitization).

              The Revolving Credit Facility as amended as of the date of this document includes an "accordion" feature that allows Ares Capital, under certain circumstances, to increase the size of the

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Revolving Credit Facility to a maximum of $897.5 million prior to the closing of the merger and up to a maximum of $1.05 billion upon the closing of the merger. The Revolving Credit Facility also continues to include usual and customary events of default and covenants for senior secured revolving credit facilities of this nature. As of January 22, 2010, there was $490.7 million outstanding under the Revolving Credit Facility and Ares Capital continued to be in compliance with all of the limitations and requirements of the Revolving Credit Facility.

CP Funding Facility

              In October 2004, we formed Ares Capital CP Funding LLC ("Ares Capital CP"), a wholly owned subsidiary of the Company, through which we established a revolving facility, referred to as the "CP Funding Facility," that, as amended, allowed Ares Capital CP to issue up to $350 million of variable funding certificates. On May 7, 2009, the Company and Ares Capital CP entered into an amendment that, among other things, converted the CP Funding Facility from a revolving facility to an amortizing facility, extended the maturity from July 21, 2009 to May 7, 2012, reduced the availability from $350 million to $225 million (with a reduction in the outstanding balance required by each of December 31, 2010 and December 31, 2011) and decreased the advance rates applicable to certain types of eligible loans. In addition, the interest rate charged on the CP Funding Facility was increased from the commercial paper, Eurodollar or adjusted Eurodollar rate, as applicable, plus 2.50% to the commercial paper, Eurodollar or adjusted Eurodollar rate, as applicable, plus 3.50% and the commitment fee requirement was removed. The Company also paid a renewal fee of 1.25% of the total facility amount, or $2.8 million. As of September 30, 2009, there was $223.0 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, 2008, there was $114.3 million outstanding under the CP Funding Facility.

              The CP Funding Facility is secured by all of the assets held by Ares Capital CP, which as of September 30, 2009 consisted of 36 investments. In addition, the CP Funding Facility is guaranteed by all of the assets of Ares Capital CP Funding II LLC, or "Ares Capital CP II," our indirect, wholly owned subsidiary. See Note 7 to our consolidated financial statements for the period ended September 30, 2009 for more detail on the CP Funding Facility.

              On January 22, 2010, Ares Capital combined the CP Funding Facility with the CP Funding II Facility into a single $400 million revolving securitized facility between Ares Capital CP and Wachovia. The combination, among other things, converted the CP Funding Facility from an amortizing facility to a revolving facility, extended the maturity date to January 22, 2013 (with two one-year extension options, subject to mutual consent) and modified the pricing structure of the CP Funding Facility. As a result of the combination, Ares Capital terminated the CP Funding II Facility.

              The CP Funding Facility is secured by all of the assets held by Ares Capital CP. As of the date of this document, subject to certain exceptions, the interest charged on the CP Funding Facility is based on LIBOR plus an applicable spread of between 2.25% and 3.75% or a "base rate" (which is the higher of a prime rate or the federal funds rate plus 0.50%) plus an applicable spread of between 1.25% to 2.75%, in each case based on a pricing grid depending upon the credit rating of Ares Capital. The effective LIBOR spread under the CP Funding Facility on January 22, 2010 was 2.75%. The CP Funding Facility continues to include usual and customary events of default and covenants for securitized revolving facilities of this nature and companies of this type. As of January 22, 2010, there was approximately $209 million outstanding under the CP Funding Facility and Ares Capital CP continued to be in compliance with all of the limitations and requirements of the CP Funding Facility.

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CP Funding II Facility

              On July 21, 2009, Ares Capital CP II Funding LLC ("Ares Capital CP II") entered into an agreement with Wachovia Bank N.A. ("Wachovia") to establish a new revolving facility (the "CP Funding II Facility") whereby Wachovia agreed to extend credit to Ares Capital CP II in an aggregate principal amount not exceeding $200 million at any one time outstanding. The CP Funding II Facility is scheduled to expire on July 21, 2012, with two one-year extension options, subject to mutual consent. Subject to certain exceptions, the interest charged on the CP Funding II Facility is based on LIBOR plus 4.00%. The CP Funding II Facility is secured by all of the assets held by Ares Captial CP II. As of September 30, 2009, there were no amounts outstanding on the CP Funding II Facility. In addition, the CP Funding II Facility is guaranteed by all the assets of Ares Capital CP. See Note 7 to our consolidated financial statements for the period ended September 30, 2009 for more detail on the CP Funding II Facility.

              On January 22, 2010, Ares Capital combined the CP Funding Facility with the CP Funding II Facility. As a result of the combination, Ares Capital terminated the CP Funding II Facility.

Debt Securitization

              In July 2006, through our wholly owned subsidiary, ARCC CLO 2006 LLC ("ARCC CLO"), we completed a $400 million debt securitization (the "Debt Securitization") and issued approximately $314.0 million principal amount of asset-backed notes (including $50.0 million of revolving notes, all of which were drawn down as of September 30, 2009) (the "CLO Notes") to third parties that are secured by a pool of middle market loans that were purchased or originated by the Company. Such CLO Notes are included in the September 30, 2009 consolidated balance sheet. We retained approximately $86.0 million of aggregate principal amount of certain BBB/Baa2 and non-rated securities in the Debt Securitization (the "Retained Notes"). During the nine months ended September 30, 2009, we repurchased, in several open market transactions, $34.8 million of CLO Notes, consisting of $14.0 million of the Class B Notes and $20.8 million of the Class C Notes, for a total purchase price of $8.2 million. As a result of these purchases, we recognized a $26.5 million gain on the extinguishment of debt and as of September 30, 2009, we held an aggregate principal amount of $120.8 million of CLO Notes, in total. All of the CLO Notes mature on December 20, 2019, and, as of September 30, 2009, there was $273.8 million outstanding under the Debt Securitization (excluding the Retained Notes). The blended pricing of the CLO Notes, excluding fees, is approximately 3-month LIBOR plus 27 basis points.

              As of September 30, 2009, there were 54 investments securing the notes. See Note 7 to our consolidated financial statements for the period ended September 30, 2009 for more detail on the Debt Securitization.

              The Moody's Investors Service rating of the Class A-1B Notes, the Class A-2B Notes, the Class B Notes and the Class C Notes have been reduced below the respective ratings issued for such notes on the Debt Securitization's closing date. As of September 30, 2009, the Class A-1B Notes had a rating of Aa2, the Class A-2B Notes had a rating of Aa1, the Class B Notes had a rating of A1 and the Class C Notes had a rating of Baa3. As a result of the downgrades, among other things, our ability to transfer loans out of the Debt Securitization has been restricted and certain principal proceeds must be used to further reduce the outstanding principal balance of such notes on each distribution date.

PORTFOLIO VALUATION

              Investments for which market quotations are readily available are typically valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available

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

              As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company's debt and equity), the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company's securities to publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation.

              Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors, based on the input of our management and audit committee and independent valuation firms under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which we have recorded it.

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

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

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              Effective January 1, 2008, we adopted SFAS 157, which expands the application of fair value accounting for investments (see Note 8 to the consolidated financial statements).

OFF BALANCE SHEET ARRANGEMENTS

              As of September 30, 2009 and December 31, 2008, we had the following commitments to fund various revolving senior secured and subordinated loans (in millions):

 
  September 30,
2009
  December 31,
2008
 

Total revolving commitments

  $ 295.4   $ 419.0  
 

Less: funded commitments

    (90.4 )   (139.6 )
           

Total unfunded commitments

    205.0     279.4  
 

Less: commitments substantially at our discretion

    (10.0 )   (32.4 )
 

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

    (89.0 )   (64.5 )
           

Total net adjusted unfunded revolving commitments

  $ 106.0   $ 182.5  
           

              Of the total commitments as of September 30, 2009, $174.2 million extend beyond the maturity date for the Revolving Credit Facility. Additionally, $104.4 million of the total commitments or $6.5 million of the net adjusted unfunded commitments are scheduled to expire in 2009. Included within the total commitments as of September 30, 2009 are commitments to issue up to $24.3 million in standby letters of credit through a financial intermediary on behalf of certain portfolio companies.

              Under these arrangements, we would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. As of September 30, 2009, we had $21.4 million in standby letters of credit issued and outstanding on behalf of the portfolio companies, of which no amounts were recorded as a liability. Of these letters of credit, $0.4 million expire on January 31, 2010, $0.2 million expire on February 28, 2010, $3.7 million expire on March 31, 2010, $8.1 million expire on July 31, 2010 and $9.0 million expire on September 30, 2010. These letters of credit may be extended under substantially similar terms for additional one-year terms at our option until the Revolving Credit Facility, under which the letters of credit were issued. As of September 30, 2009, the Revolving Credit Facility matured on December 28, 2010.

              As of September 30, 2009 and December 31, 2008, we were subject to subscription agreements to fund equity investments in private equity investment partnerships, substantially all at our discretion, as follows (in millions):

 
  September 30,
2009
  December 31,
2008
 

Total private equity commitments

  $ 428.3   $ 428.3  

Total unfunded private equity commitments

  $ 419.1   $ 423.6  

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.

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Interest Rate Risk

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

              As of September 30, 2009, approximately 57% of the investments at fair value in our portfolio were at fixed rates while approximately 30% were at variable rates and 13% were non-interest earning. Additionally, 11% of the investments at fair value or 37% of the investments at fair value with variable rates contain interest rate floor features. The Debt Securitization, the CP Funding Facility and the Revolving Credit Facility all feature variable rates.

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

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

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

              Based on our September 30, 2009 balance sheet, the following table shows the impact on net income of base rate changes in interest rates assuming no changes in our investment and borrowing structure and reflecting the effect of our interest rate swap agreement described above and in Note 11 of the consolidated financial statements (in millions):

Basis Point Change
  Interest Income   Interest Expense   Net Income  

     Up 300 basis points

  $ 14.0   $ 20.8   $ (6.8 )

     Up 200 basis points

  $ 8.9   $ 13.9   $ (5.0 )

     Up 100 basis points

  $ 4.4   $ 6.9   $ (2.5 )

Down 100 basis points

  $ (2.3 ) $ (4.2 ) $ 1.9  

Down 200 basis points

  $ (3.5 ) $ (8.4 ) $ 4.9  

Down 300 basis points

  $ (4.7 ) $ (12.6 ) $ 7.9  

              Based on our December 31, 2008 balance sheet, the following table shows the impact on net income of base rate changes in interest rates assuming no changes in our investment and borrowing structure and reflecting the effect of our interest rate swap agreement described above and in Note 11 of the consolidated financial statements (in millions):

Basis Point Change
  Interest Income   Interest Expense   Net Income  

     Up 300 basis points

  $ 21.4   $ 25.0   $ (3.6 )

     Up 200 basis points

  $ 14.2   $ 16.7   $ (2.5 )

     Up 100 basis points

  $ 7.1   $ 8.3   $ (1.2 )

Down 100 basis points

  $ (6.2 ) $ (8.3 ) $ 2.1  

Down 200 basis points

  $ (11.2 ) $ (15.1 ) $ 3.9  

Down 300 basis points

  $ (14.7 ) $ (17.0 ) $ 2.3  

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SENIOR SECURITIES
(dollar amounts in thousands, except per share data)

              Information about our senior securities (including preferred stock, debt securities and other indebtedness) is shown in the following tables as of each fiscal year ended December 31 since we commenced operations and as of September 30, 2009. The report of our independent registered public accounting firm, KPMG LLP, on the senior securities table as of December 31, 2008 is attached as an exhibit to the registration statement of which this prospectus is a part. The "—" indicates information that the SEC expressly does not require to be disclosed for certain types of senior securities.

Class and Year
  Total Amount
Outstanding
Exclusive of
Treasury
Securities(1)
  Asset
Coverage
Per Unit(2)
  Involuntary
Liquidating
Preference
Per Unit(3)
  Average
Market Value
Per Unit(4)

Revolving Credit Facility

                     

Fiscal 2009 (as of September 30, 2009, unaudited)

  $ 271,091   $ 915.15          

Fiscal 2008

  $ 480,486   $ 1,165.69   $   N/A

Fiscal 2007

  $ 282,528   $ 1,098.58   $   N/A

Fiscal 2006

  $ 193,000   $ 1,056.23   $   N/A

Fiscal 2005

  $   $   $   N/A

CP Funding Facility

                     

Fiscal 2009 (as of September 30, 2009, unaudited)

  $ 223,027   $ 752.90          

Fiscal 2008

  $ 114,300   $ 277.30   $   N/A

Fiscal 2007

  $ 85,000   $ 330.07   $   N/A

Fiscal 2006

  $ 15,000   $ 82.09   $   N/A

Fiscal 2005

  $ 18,000   $ 32,645.12   $   N/A

CP Funding II Facility

                     

Fiscal 2009 (as of September 30, 2009, unaudited)

  $ 0     N/A          

Debt Securitization

                     

Fiscal 2009 (as of September 30, 2009, unaudited)

  $ 273,753   $ 924.14          

Fiscal 2008

  $ 314,000   $ 761.78   $   N/A

Fiscal 2007

  $ 314,000   $ 1,220.95   $   N/A

Fiscal 2006

  $ 274,000   $ 1,499.51   $   N/A

(1)
Total amount of each class of senior securities outstanding at the end of the period presented.

(2)
The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit. In order to determine the specific Asset Coverage Per Unit for each of the Revolving Credit Facility, the CP Funding Facility and the Debt Securitization, the total Asset Coverage Per Unit was divided based on the amount outstanding at the end of the period for each.

(3)
The amount to which such class of senior security would be entitled upon our involuntary liquidation in preference to any security junior to it.

(4)
Not applicable, as none of our current senior securities are registered for public trading.

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BUSINESS

GENERAL

              Ares Capital, a Maryland corporation, is a specialty finance company that is a closed-end, non-diversified management investment company. We have elected to be regulated as a BDC under the Investment Company Act. We were founded on April 16, 2004, were initially funded on June 23, 2004 and completed our initial public offering on October 8, 2004. Ares Capital's investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in U.S. middle-market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive. However, we may from time to time invest in larger companies.

              We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component like warrants. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Mezzanine debt is subordinated to senior loans and is generally unsecured. Our debt investments have ranged between $10 million and $100 million each, although the investment sizes may be more or less than the targeted range and are expected to grow with our capital availability. We also, to a lesser extent, make equity investments. Each of our equity investments has generally been less than $20 million, but may grow with our capital availability and are usually made in conjunction with loans we make to these portfolio companies.

              The proportion of these investments will change over time given our views on, among other things, the economic and credit environment we are operating in. In connection with our investing activities, we may make commitments with respect to indebtedness or securities of a potential portfolio company substantially in excess of our final investment. In such situations, while we may initially agree to fund up to a certain dollar amount of an investment, we may syndicate a portion of such amount to third parties prior to closing such investment, such that we make a smaller investment than what was reflected in our original commitment.

              The first and second lien senior loans generally have stated terms of three to 10 years and the mezzanine debt investments generally have stated terms of up to 10 years, but the expected average life of such first and second lien loans and mezzanine debt is generally between three and seven years. However, we may invest in securities with any maturity or duration. The debt that we invest in typically is not initially rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than "Baa3" by Moody's Investors Service or lower than "BBB-" by Standard & Poor's). We may invest without limit in debt of any rating, as well as debt that has not been rated by any nationally recognized statistical rating organization.

              We believe that our investment adviser, Ares Capital Management, 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 has been in existence for more than 12 years and its senior principals have an average of over 20 years experience investing in senior loans, high yield bonds, mezzanine debt and private equity securities. The Company has access to the Ares staff of approximately 110 investment professionals and to over 150 administrative professionals employed by Ares who provide assistance in accounting, legal, compliance, technology and investor relations.

              While our primary focus is to generate current income and capital appreciation through investments in first and second lien senior loans and mezzanine debt and, to a lesser extent, equity securities of eligible portfolio companies, we also may invest up to 30% of our portfolio in

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

              In addition, our portfolio company, IHAM, manages three unconsolidated senior debt funds, the Ivy Hill Funds, and serves as the sub-adviser/sub-manager for four others: the the CoLTS Funds and FirstLight. As of December 31, 2009, IHAM had total committed capital under management of over $2.3 billion.

              We and GE Commercial Finance Investment Advisory Services LLC also co-manage an unconsolidated senior debt fund: the SL Fund.

Recent Developments

Allied Acquisition

              On October 26, 2009, we entered into a definitive agreement to acquire Allied Capital in an all stock transaction valued at $862 million, or approximately $4.61 per Allied Capital share as of January 20, 2010. The boards of directors of both companies have each unanimously approved the Allied Acquisition.

              Allied Capital is an internally managed BDC. Allied Capital invests in primarily private middle-market companies in a variety of industries through long-term debt and equity capital instruments.

              While there can be no assurances as to the exact timing, or that the Allied Acquisition will be completed at all, we are working to complete the Allied Acquisition in the first quarter of 2010. The consummation of the Allied Acquisition is subject to certain conditions, including, among others, Allied Capital stockholder approval, Ares Capital stockholder approval, required regulatory approvals (including expiration of the waiting period under the HSR Act, the early termination of which was granted on December 1, 2009), receipt of certain Ares Capital and Allied Capital lender consents and other customary closing conditions.

              On January 14, 2010, Prospect Capital Corporation ("Prospect Capital") proposed to Allied Capital to acquire all of the issued and outstanding shares of Allied Capital in a stock-for-stock merger. On January 19, 2010, the Board of Directors of Allied Capital unanimously rejected the offer. On January 26, 2010, Prospect Capital renewed its proposal and increased it proposed share exchange ratio from 0.385 Prospect Capital shares for each Allied Capital Share to 0.40 Prospect Capital shares for each Allied Capital Share.

              We cannot assure you that the Allied Acquisition will be consummated as scheduled, or at all (including as a result of any competing offer). See "Pending Allied Acquisition" for a more detailed description of the terms of the Allied Acquisition, "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" for a description of the risks associated with a failure to consummate the Allied Acquisition and "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition" for a description of the risks that the combined company may face if the Allied Acquisition is consummated.

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Unitranche Fund Acquisition

              In a separate transaction, on October 30, 2009, we completed our acquisition of Allied Capital's interests in the SL Fund for $165 million in cash. The SL Fund was formed in December 2007 to invest in "unitranche" loans of middle-market companies and has approximately $3.6 billion of committed capital, approximately $900 million in aggregate principal amount of which is currently funded. Of the $2.7 billion of unfunded committed capital, approximately $350 million would be funded by us. As of January 15, 2010, we made one investment in the SL Fund of $11.6 million since our acquisition of the SL Fund on October 30, 2009. Our investment entitles us to a coupon of LIBOR plus 8.0% and certain other sourcing and management fees. In addition, since we invest in the substantial majority of the subordinated certificates in the SL Fund, our underlying investment also entitles us to a substantial portion of the excess cash flows from the loan portfolio.

Ivy Hill SDF Acquisition

              On December 29, 2009, we made an incremental investment in IHAM to facilitate its acquisition of Allied Capital's management rights in respect of, and interests in, the Allied Capital Senior Debt Fund (now referred to as "Ivy Hill SDF"), for approximately $33 million in cash. Ivy Hill SDF currently has approximately $294 million of committed capital invested primarily in first lien loans and to a lesser extent, second lien loans of middle-market companies. IHAM manages Ivy Hill SDF and receives fee income and potential equity distributions in respect of interests that it acquired in Ivy Hill SDF.

Other Investment Activity

              As of January 15, 2010, we made $381.8 million of investments (including agreements to fund revolving credit facilities or delayed draw loans) since September 30, 2009. Of these investments, approximately 27% were made in first lien senior secured debt, 62% in senior subordinated debt and 11% in equity/other securities. Of these investments, 26% bear interest at floating rates with a weighted average stated rate of LIBOR plus 11% and 65% bear interest at fixed rates with a weighted average stated rate of 16.6%. As of January 15, 2010, we exited $423.9 million of investments since September 30, 2009. Of these investments, approximately 31% were first lien senior secured debt, 18% were second lien senior secured debt, 48% were senior subordinated debt and 3% were equity securities. Of these investments, 43% bear interest at floating rates with a weighted average stated rate of LIBOR plus 7% and 47% bear interest at fixed rates with a weighted average stated rate of 12%.

              In addition, as of January 21, 2010, we had an investment backlog and pipeline of $137.7 million and $214.9 million, respectively. We expect to syndicate a portion of these investments and commitments to third parties. The consummation of any of the investments in this backlog and pipeline depends upon, among other things: satisfactory completion of our due diligence investigation of the prospective portfolio company, our acceptance of the terms and structure of such investment and the execution and delivery of satisfactory transaction documentation. We cannot assure you that we will make any of these investments or that we will syndicate any portion of our investments and commitments.

About Ares

              Founded in 1997, Ares is a global alternative asset manager and SEC registered investment adviser with approximately $33 billion of total committed capital and over 250 employees as of December 31, 2009.

              Ares specializes in originating and managing assets in both the leveraged finance and private equity markets. Ares' leveraged finance activities include the origination, acquisition and management of senior loans, high yield bonds, mezzanine debt and special situation investments. Ares' private equity

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activities focus on providing flexible, junior capital to middle-market companies. Ares has the ability to invest across a capital structure, from senior floating rate debt to common equity. This flexibility, combined with Ares' "buy and hold" philosophy, enables Ares to structure an investment to meet the specific needs of a company rather than the less flexible demands of the public markets.

              Ares is comprised of the following groups:

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

Ares Capital Management

              Ares Capital Management, our investment adviser, is served by a dedicated origination and transaction development team of approximately 34 investment professionals led by the partners of Ares Capital Management, Michael Arougheti, Eric Beckman, Kipp deVeer, Mitchell Goldstein and Michael Smith. Ares Capital Management leverages off of Ares' entire investment platform and benefits from the significant capital markets, trading and research expertise of all of Ares' investment professionals. Ares funds currently hold over 700 investments in over 30 different industries. Ares Capital Management's investment committee has nine members, including the partners of Ares Capital Management and Senior Partners of Ares Capital Markets Group and Private Equity Group. See "Management—Portfolio Managers."

MARKET OPPORTUNITY

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

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COMPETITIVE ADVANTAGES

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

Existing Investment Platform

              As of December 31, 2009, Ares managed approximately $33 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. Specifically, the Ares platform provides the Company an advantage through its deal flow generation and investment evaluation process. Ares Capital's asset management platform also provides additional market information, company knowledge and industry insight that benefits the investment and due diligence process. Ares' professionals maintain extensive financial sponsor and intermediary relationships, which provide valuable insight and access to transactions and information.

Seasoned Management Team

              John Kissick, Antony Ressler, Bennett Rosenthal and David Sachs serve on Ares Capital Management's investment committee and have an average of over 20 years experience in leveraged finance, including substantial experience in investing in leveraged loans, high yield bonds, mezzanine debt, distressed debt and private equity securities. Ares Capital Management's investment professionals and members of its investment committee also have significant experience investing across market cycles. As a result of Ares' extensive investment experience and the history of its seasoned management

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team, Ares has developed a strong reputation across U.S. and European capital markets. We believe that Ares' long history in the leveraged loan market and the extensive experience of the principals investing across market cycles provides Ares Capital Management with a competitive advantage in identifying, investing in, and managing a portfolio of investments in middle-market companies.

Experience and Focus on Middle-Market Companies

              Ares has historically focused on investments in middle-market companies and we benefit from this experience. In sourcing and analyzing deals, our investment adviser uses Ares' extensive network of relationships with intermediaries focused on middle-market companies, including management teams, members of the investment banking community, private equity groups and other investment firms with whom Ares has had long-term relationships. We believe this network enables us to attract well-positioned prospective portfolio company investments. Our investment adviser works closely with the Ares investment professionals who oversee a portfolio of investments in over 700 companies and provide access to an extensive network of relationships and special insights into industry trends and the state of the capital markets.

Disciplined Investment Philosophy

              In making its investment decisions, our investment adviser has adopted Ares' long-standing, consistent credit-based investment approach that was developed over 18 years ago by its founders. Specifically, Ares Capital Management's investment philosophy, portfolio construction and portfolio management involve an assessment of the overall macroeconomic environment, financial markets and company-specific research and analysis. Our investment approach emphasizes capital preservation, low volatility and minimization of downside risk. In addition to engaging in extensive due diligence from the perspective of a long-term investor, Ares Capital Management's approach seeks to reduce risk in investments by focusing on:

Extensive Industry Focus

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

Flexible Transaction Structuring

              We are flexible in structuring investments, including the types of securities in which we invest and the terms associated with such investments. The principals of Ares have extensive experience in a

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

Broad Origination Strategy

              Our investment adviser focuses on self-originating most of our investments, by identifying a broad array of investment opportunities across multiple channels. It also leverages off of the extensive relationships of the broader Ares platform, including the relationships with portfolio companies held by funds managed by IHAM, to identify investment opportunities. We believe that this allows for asset selectivity and that there is a significant relationship between proprietary deal origination and credit performance. Our focus on generating proprietary deal flow and lead investing also gives us greater control over capital structure, deal terms, pricing and documentation and results in active portfolio management of investments. Moreover, by leading the investment process, our investment adviser is able to secure controlling positions in credit tranches providing additional control in investment outcomes. Our investment adviser also has originated substantial proprietary deal flow from middle market intermediaries, which often allows us to act as the sole or principal source of institutional junior capital to the borrower.

OPERATING AND REGULATORY STRUCTURE

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

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

              Also, while we may borrow funds to make investments, our ability to use debt is limited in certain significant respects. As a BDC and a RIC, we are dependent on its ability to raise capital through the issuance of its common stock. RICs generally must distribute substantially all of their

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earnings to stockholders as dividends in order to preserve their status as RICs and avoid corporate-level U.S. income tax, which prevents us from using those earnings to support operations, which may include new investments (including investments into existing portfolio companies). Further, BDCs must meet a debt to equity ratio of less than 1:1 in order to incur debt or issue senior securities, which requires us to finance its investments with at least as much equity as debt and senior securities in the aggregate. Our credit facilities also require that we maintain a debt to equity ratio of less than 1:1.

INVESTMENTS

Ares Capital Portfolio

              We have built an investment portfolio of primarily first and second lien loans, mezzanine debt and to a lesser extent equity investments in private middle-market companies. Our portfolio is well diversified by industry sector and its concentration to any single issuer is limited. Our debt investments generally range between $10 million to $100 million on average, although the investment size may be more or less than this range and depending on capital availability. Each of our equity investments has generally been less than $20 million, but may grow with our capital availability and are usually made in conjunction with loans we make to these companies. In addition, the proportion of these investments will change over time given our views on, among other things, the economic and credit environment we are operating in. In connection with our investing activities, we may make commitments with respect to indebtedness or securities of a potential portfolio company substantially in excess of our final investment. In such situations, while we may initially agree to fund up to a certain dollar amount of an investment, we may syndicate a portion of such amount to third parties prior to closing such investment, such that we make a smaller investment than what was reflected in our original commitment. In addition to originating investments, we may also acquire investments in the secondary market.

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

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

              Our principal focus is investing in first and second lien senior loans and mezzanine debt and, to a lesser extent, equity capital, of middle-market companies in a variety of industries. We generally target companies that generate positive cash flows. Ares has a staff of approximately 110 investment professionals who specialize in specific industries. We generally seek to invest in companies from the industries in which Ares' investment professionals have direct expertise. The following is a representative list of the industries in which Ares has invested:

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

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              The industrial and geographic compositions of our portfolio at fair value as of September 30, 2009 and December 31, 2008 were as follows:

Industry
  As of
September 30,
2009
  As of
December 31,
2008
 

Health Care

    19.5 %   20.2 %

Education

    9.6     11.1  

Beverage/Food/Tobacco

    8.7     7.8  

Restaurants and Food Services

    8.6     8.1  

Other Services

    7.5     7.4  

Financial

    7.5     7.0  

Business Services

    6.8     6.7  

Retail

    5.8     5.7  

Manufacturing

    4.6     3.8  

Computers/Electronics

    3.3     1.2  

Printing/Publishing/Media

    3.1     3.8  

Aerospace and Defense

    3.1     3.0  

Consumer Products

    3.0     3.0  

Telecommunications

    2.2     2.0  

Environmental Services

    1.9     4.1  

Cargo Transport

    1.5     1.4  

Health Clubs

    1.2     1.2  

Containers/Packaging

    1.1     1.4  

Grocery

    1.0     1.0  

Homebuilding

    0.0     0.1  
           
 

Total

    100.0 %   100.0 %
           

 

Geographic Region
  September 30,
2009
  December 31,
2008
 

Mid-Atlantic

    22.5 %   21.0 %

Midwest

    21.9     20.6  

Southeast

    20.6     22.2  

West

    18.2     18.3  

International

    13.1     14.1  

Northeast

    3.7     3.8  
           
 

Total

    100.0 %   100.0 %
           

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

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Managed Funds Portfolio

              We and GE Commercial Finance Investment Advisory Services LLC co-manage an unconsolidated senior debt fund: the SL Fund. The SL Fund primarily invests in "unitranche" loans of middle-market companies. The SL Fund was initially formed in December 2007 with approximately $3.6 billion of committed capital.

              Our portfolio company, IHAM, manages an unconsolidated middle market credit fund, Ivy Hill I, in exchange for a combined 0.50% management fee on the average total assets of Ivy Hill I. Ivy Hill I primarily invests in first and second lien bank debt of middle-market companies. Ivy Hill I was initially funded in November 2007 with $404.0 million of capital including a $56.0 million investment by us consisting of $40.0 million of Class B Notes and $16.0 million of subordinated notes.

              Ivy Hill I purchased $18.0 million and $68.0 million of investments from us for the nine months ended September 30, 2009 and year ended December 31, 2008, respectively.

              On November 5, 2008, we established a second unconsolidated middle market credit fund, Ivy Hill II, which is also managed by IHAM in exchange for a combined 0.50% management fee on the average total assets of Ivy Hill II. Ivy Hill II primarily invests in second lien and subordinated bank debt of middle-market companies. Ivy Hill II was initially funded with $250.0 million of subordinated notes, and may grow over time with leverage. Ivy Hill II purchased $27.5 million and $7.5 million of investments from us for the nine months ended September 30, 2009 and the year ended December 31, 2008, respectively. The Ivy Hill Funds may, from time to time, buy additional loans from us.

              On December 29, 2009, we made an incremental investment in IHAM to facilitate its acquisition of Allied Capital's management rights in respect of, and interests in, the Allied Capital Senior Debt Fund (now referred to as "Ivy Hill SDF"), for approximately $33 million in cash. Ivy Hill SDF currently has approximately $294 million of committed capital invested primarily in first lien loans and to a lesser extent, second lien loans of middle-market companies. IHAM manages Ivy Hill SDF and receives fee income and potential equity distributions in respect of interests that it acquired in Ivy Hill SDF.

              IHAM also serves as the sub-adviser/sub-manager for four other funds: the CoLTS Funds and FirstLight. As of December 31, 2009, IHAM had total committed capital under management of over $2.3 billion.

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

INVESTMENT SELECTION

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

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

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

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

Intensive Due Diligence

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

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Selective Investment Process

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

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

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

Issuance of Formal Commitment

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

Debt Investments

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

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

              In some cases, our debt investments may provide for a portion of the interest payable to be payment-in-kind interest. To the extent interest is payment-in-kind, it will be payable through the increase of the principal amount of the loan by the amount of interest due on the then-outstanding aggregate principal amount of such loan.

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              In the case of our first and second lien senior loans and mezzanine debt, we tailor the terms of the investment to the facts and circumstances of the transaction and the prospective portfolio company, negotiating a structure that aims to protect our rights and manage our risk while creating incentives for the portfolio company to achieve its business plan and improve its profitability. For example, in addition to seeking a senior position in the capital structure of our portfolio companies, we will seek, where appropriate, to limit the downside potential of our investments by:

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

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

Equity Investments

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

ON-GOING RELATIONSHIPS WITH AND MONITORING OF PORTFOLIO COMPANIES

              Ares Capital Management closely monitors each investment we make, maintains a regular dialogue with both the management team and other stakeholders and seeks specifically tailored financial reporting. In addition, senior investment professionals of Ares may take board seats or obtain

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board observation rights for our portfolio companies. As of September 30, 2009, of our 94 funded portfolio companies, we were entitled to board seats or board observation rights on 41% of the operating companies in our portfolio or 58% of our total portfolio at fair value.

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

              In addition to various risk management and monitoring tools, our investment adviser grades the credit status of all investments on a scale of 1 to 4 no less frequently than quarterly. This system is intended to reflect the performance of the portfolio company's business, the collateral coverage of the investment and other relevant factors. Under this system, investments with a grade of 4 involve the least amount of risk in our portfolio. This portfolio company is performing above expectations and the trends and risk factors are generally favorable, including a potential exit. Investments graded 3 involve a level of risk that is similar to the risk at the time of origination. This portfolio company is performing as expected and the risk factors are neutral to favorable. All new investments are initially assessed a grade of 3. Investments graded 2 involve a portfolio company performing below expectations and indicates that the investment risk has increased materially since origination. This portfolio company may be out of compliance with debt covenants, however, payments are generally not more than 120 days past due. For investments graded 2, our investment adviser increases procedures to monitor the portfolio company and will write down the fair value of the investment if it is deemed to be impaired. An investment grade of 1 indicates that the portfolio company is performing materially below expectations and that the investment risk has substantially increased since origination. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Investments graded 1 are not anticipated to be repaid in full. Our investment adviser employs half-point increments to reflect underlying trends in portfolio company operating or financial performance, as well as the general outlook. As of September 30, 2009, the weighted average investment grade of the investments in our portfolio was 3.0 with 5.3% of total investments at amortized cost (or 1.7% at fair value) and seven loans were past due or on non-accrual status.

MANAGERIAL ASSISTANCE

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

COMPETITION

              Our primary competition to provide financing to middle-market companies include public and private funds, commercial and investment banks, commercial financing companies and private equity funds. Many of our competitors are substantially larger and have considerably greater financial and marketing resources than we do. For example, some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the Investment Company Act imposes on us as a BDC.

              We use the industry information of Ares' investment professionals to which we have access to assess investment risks and determine appropriate pricing for our investments in portfolio companies.

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In addition, we believe that the relationships of the members of Ares Capital Management's investment committees and of the senior principals of Ares, enable us to learn about, and compete effectively for, financing opportunities with attractive middle-market companies in the industries in which we seek to invest. The Ares' professionals' deep and long-standing direct sponsor relationships and the resulting proprietary transaction opportunities that these relationships often present, provide valuable insight and access to transactions and information. For additional information concerning the competitive risks we face, see "Risk Factors—Risks Relating to Our Business—We operate in a highly competitive market for investment opportunities."

MARKET CONDITIONS

              Due to volatility in global markets, the availability of capital and access to capital markets has been limited over the last two years. We have responded to constraints on raising new capital by pursuing other avenues of liquidity and growth, such as adjusting the pace of our investments, becoming more selective in evaluating investment opportunities, pursuing asset sales, developing our third-party asset management capabilities and/or recycling lower yielding investments. We also intend to continue pursuing opportunities to manage third-party funds. As the global liquidity situation and market conditions evolve, we will continue to monitor and adjust our approach to funding accordingly. However, given the unprecedented nature of the volatility in the global markets, there can be no assurances that these activities will be successful. While levels of market disruption and volatility appear to be improving, there can be no assurance that they will not worsen. If they do, we could face materially higher financing costs. Consequently, our operating strategy could be materially and adversely affected.

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

              See "Risk Factors—Risks Relating to Our Business—Capital markets have recently been in a period of disruption and instability. These market conditions have materially and adversely affected debt and equity capital markets in the United States, which has had, and may in the future have, a negative impact on our business and operations."

STAFFING

              We do not currently have any employees and do not expect to have any employees. Services necessary for our business are provided by individuals who are employees of Ares Capital Management and Ares Operations, pursuant to the terms of the investment advisory and management agreement and the administration agreement. Each of our executive officers described under "Management" is an employee of Ares Operations or Ares Capital Management. Our day-to-day investment operations are managed by our investment adviser. Most of the services necessary for the origination and administration of our investment portfolio are provided by investment professionals employed by Ares Capital Management. Ares Capital Management has approximately 34 investment professionals who focus on origination and transaction development and the ongoing monitoring of our investments. See "Management—Investment Advisory and Management Agreement." In addition, we reimburse Ares Operations for our allocable portion of expenses incurred by it in performing its obligations under the administration agreement, including our allocable portion of the cost of our officers (including our

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chief compliance officer, chief financial officer, secretary and treasurer) and their respective staffs. See "Management—Administration Agreement."

PROPERTIES

              We do not own any real estate or other physical properties materially important to our operation. Our headquarters are currently located at 280 Park Avenue, 22nd Floor, Building East, New York, New York 10017. We rent the office space directly from a third party pursuant to a lease that expires on February 27, 2011. In addition, we have entered into a sublease with Ares Management whereby Ares Management subleases approximately 25% of certain office space for a fixed rent equal to 25% of the basic annual rent payable by us under this lease, plus certain additional costs and expenses.

LEGAL PROCEEDINGS

              We are aware that a number of lawsuits have been filed by stockholders of Allied Capital challenging the Allied Acquisition. The suits are filed either as putative stockholder class actions, shareholder derivative actions or both. All of the actions assert similar claims against the members of Allied Capital's board of directors alleging that the Merger Agreement is the product of a flawed sales process and that Allied Capital's directors breached their fiduciary duties by agreeing to a structure that was not designed to maximize the value of Allied Capital's stockholders and by failing to adequately value and obtain fair consideration for Allied Capital's shares. They also claim that Ares Capital (and, in several cases, the merger subsidiary, and, in several other cases, Allied Capital) aided and abetted the directors' alleged breaches of fiduciary duties. All of the actions demand, among other things, a preliminary and permanent injunction enjoining the Allied Acquisition and rescinding the transaction or any part thereof that may be implemented.

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PENDING ALLIED ACQUISITION

              On October 26, 2009, we entered into a definitive agreement to acquire Allied Capital in an all stock transaction valued at $648 million, or approximately $3.47 per Allied Capital share as of October 23, 2009. The boards of directors of both companies have each unanimously approved the Allied Acquisition.

              Allied Capital is an internally managed BDC. Allied Capital invests in primarily private middle-market companies in a variety of industries through long-term debt and equity capital instruments.

              Upon consummation of the Allied Acquisition, each share of common stock of Allied Capital issued and outstanding immediately prior to the effective time of the Allied Acquisition will be converted into and become exchangeable for 0.325 common shares of Ares Capital, subject to the payment of cash instead of fractional shares. Based on the number of shares of Allied common stock outstanding on the date of the Merger Agreement and not including the effect of outstanding in-the-money options, this will result in approximately 58.3 million Ares Capital shares being exchanged for approximately 179.4 million outstanding Allied Capital shares, subject to adjustment in certain limited circumstances.

              Following consummation of the Allied Acquisition, Ares Capital's board of directors will continue as directors of Ares Capital. However, Ares Capital's board of directors will be increased by at least one member and Ares Capital will submit the name of one member of Allied Capital's current board of directors for consideration to Ares Capital's Nominating and Governance Committee to fill the vacancy.

              The Merger Agreement contains (a) customary representations and warranties of Allied Capital and Ares Capital, including, among others: corporate organization, capitalization, corporate authority and absence of conflicts, third party and governmental consents and approvals, reports and regulatory matters, financial statements, compliance with law and legal proceedings, absence of certain changes, taxes, employee matters, intellectual property, insurance, investment assets and certain contracts, (b) covenants of Allied Capital and Ares Capital to conduct their respective businesses in the ordinary course until the Allied Acquisition is completed and (c) covenants of Allied Capital and Ares Capital not to take certain actions during this interim period.

              Among other things, Allied Capital has agreed to, and will cause its affiliates, consolidated subsidiaries, and its and each of their respective officers, directors, managers, employees and other advisors, representatives and agents to, immediately cease and cause to be terminated all discussions and negotiations with respect to a "Takeover Proposal" (as defined in the Merger Agreement) from a third party and not to directly or indirectly solicit or take any other action (including providing information) with the intent to solicit any inquiry, proposal or offer with respect to a Takeover Proposal.

              However, if Allied Capital receives a bona fide unsolicited Takeover Proposal from a third party, and its board of directors determines in good faith, after consultation with reputable outside legal counsel and financial advisers experienced in such matters, that failure to consider such proposal would breach the duties of the directors under applicable law, and the Takeover Proposal constitutes or is reasonably likely to result in a "Superior Proposal" (as defined in the Merger Agreement), Allied Capital may engage in discussions and negotiations with such third party so long as certain notice and other procedural requirements are satisfied. In addition, subject to certain procedural requirements (including the ability of Ares Capital to revise its offer) and the payment of a $30 million termination fee, Allied Capital may terminate the Merger Agreement and enter into an agreement with a third party who makes a Superior Proposal.

              The representations and warranties of each party set forth in the Merger Agreement (a) have been qualified by confidential disclosures made to the other party in connection with the Merger

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Agreement, (b) will not survive consummation of the Allied Acquisition and cannot be the basis for any claims under the Merger Agreement by the other party after the Allied Acquisition is consummated, (c) are qualified in certain circumstances by a materiality standard which may differ from what may be viewed as material by investors, (d) were made only as of the date of the Merger Agreement or such other date as is specified in the Merger Agreement and (e) may have been included in the Merger Agreement for the purpose of allocating risk between Allied Capital and Ares Capital rather than establishing matters as facts.

              On January 14, 2010, Prospect Capital Corporation ("Prospect Capital") proposed to Allied Capital to acquire all of the issued and outstanding shares of Allied Capital in a stock-for-stock merger. On January 19, 2010, the Board of Directors of Allied Capital unanimously rejected the offer. On January 26, 2010, Prospect Capital renewed its proposal and increased it proposed share exchange ratio from 0.385 Prospect Capital shares for each Allied Capital Share to 0.40 Prospect Capital shares for each Allied Capital Share.

              While there can be no assurances as to the exact timing, or that the Allied Acquisition will be completed at all, we are working to complete the Allied Acquisition in the first quarter of 2010. The consummation of the Allied Acquisition is subject to certain conditions, including, among others, Allied Capital stockholder approval, Ares Capital stockholder approval, required regulatory approvals (including expiration of the waiting period under the HSR Act, the early termination of which was granted on December 1, 2009), receipt of certain Ares Capital and Allied Capital lender consents and other customary closing conditions.

              The Merger Agreement also contains certain termination rights for Allied Capital and Ares Capital and provides that, in connection with the termination of the Merger Agreement under specified circumstances, Allied Capital may be required to pay Ares Capital a termination fee of $30 million ($15 million if Allied Capital stockholders do not approve the Allied Acquisition) and Ares Capital may be required to pay Allied Capital a termination fee of $30 million.

              We cannot assure you that the Allied Acquisition will be consummated as scheduled, or at all (including as a result of any competing offer). See "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" for a description of the risks associated with a failure to consummate the Allied Acquisition and "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition" for a description of the risks that the combined company may face if the Allied Acquisition is consummated.

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PORTFOLIO COMPANIES

              Our investment adviser employs an investment rating system to categorize our investments. See "Business—On-Going Relationships With and Monitoring of Portfolio Companies." As of September 30, 2009, the weighted average investment grade of the debt in our portfolio was 3.0 with 5.3% of total investments at amortized cost (or 1.7% at fair value) and seven loans past due or on non-accrual status. As of September 30, 2009, the weighted average yield of debt and income producing securities at fair value in our portfolio was approximately 12.53% (11.70% at amortized cost) (fair value is computed as (1) the annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount on accruing debt divided by (2) total debt and income producing securities at fair value and amortized cost is 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 included in such securities, divided by (b) total debt and income producing securities at amortized cost included in such securities).

              The following table describes each of the businesses included in our portfolio and reflects data as of September 30, 2009. Percentages shown for class of investment securities held by us represent percentage of the class owned and do not necessarily represent voting ownership. Percentages shown for equity securities, other than warrants or options, represent the actual percentage of the class of security held before dilution. Percentages shown for warrants and options held represent the percentage of class of security we may own assuming we exercise our warrants or options before dilution.

              We have indicated by footnote portfolio companies (a) where we directly or indirectly own more than 25% of the outstanding voting securities of such portfolio company and, therefore, are presumed to be "controlled" by us under the Investment Company Act and (b) where we directly or indirectly own 5% to 25% of the outstanding voting securities of such portfolio company or where we hold one or more seats on the portfolio company's board of directors and, therefore, are deemed to be an "affiliated person" under the Investment Company Act. We directly or indirectly own less than 5% of the outstanding voting securities of all other portfolio companies (or have no other affiliations with such portfolio companies) listed on the table. We offer to make significant managerial assistance to certain of our portfolio companies. We may also receive rights to observe the meetings of our portfolio companies' boards of directors.


ARES CAPITAL AND SUBSIDIARIES
PORTFOLIO COMPANIES
As of September 30, 2009
(dollar amounts in thousands)

Company
  Industry   Investment   Interest(1)   Maturity   % of
Class
Held at
9-30-09
  Fair Value  
3091779 Nova Scotia Inc.   Baked goods   Senior secured revolving loan   8.00%   11/3/2012         $ 7,127 (18)
1 Valleybrook Dr., Suite 203   manufacturer   Junior secured loan   10.00% Cash, 4.00% PIK   11/3/2012         $ 11,278  
Don Mills, Ontario M3B 2S7       Common stock warrants       11/3/2012     2.25%   $ (2)
                             
ADF Capital, Inc. & ADF Restaurant Group, LLC   Restaurant owner and   Senior secured revolving loan   6.50% (Libor + 3.50%/Q)   11/27/2013         $ 1,408 (3)
165 Passaic Avenue   operator   Senior secured revolving loan   6.50% (Libor + 3.50%/S)   11/27/2013         $ 2,010 (3)
Fairfield, NJ 07004       Senior secured loan   12.50% (Libor + 6.50% Cash, 3.00% PIK/Q)   11/27/2012         $ 23,615  
        Senior secured loan   12.50% (Libor + 6.50% Cash, 3.00% PIK/Q)   11/27/2012         $ 11,069  
        Promissory note   12.00% PIK   11/27/2016         $ 13,795  
        Common stock warrants             83.33%   $ 4,370 (2)
                             
American Broadband Communications, LLC and
American Broadband Holding Company
  Broadband
communication
  Senior subordinated loan   18.00% (10.00% Cash, 8.00% PIK/Q)   11/7/2014         $ 34,004  
401 N. Tryon Street, 10th Floor
Charlotte, NC 28202
  services   Senior subordinated loan   18.00% (10.00% Cash, 8.00% PIK/Q)   11/7/2014         $ 8,580  
        Common stock warrants             17.00%   $ (2)
                             

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Company
  Industry   Investment   Interest(1)   Maturity   % of
Class
Held at
9-30-09
  Fair Value  
American Renal Associates, Inc.   Dialysis provider   Senior secured loan   8.50% (Libor + 6.00%/D)   12/31/2010         $ 1,082  
5 Cherry Hill Drive, Suite 120       Senior secured loan   8.50% (Libor + 6.00%/Q)   12/13/2011         $ 10,401  
Danvers, MA 01923       Senior secured revolving loan     12/31/2010         $ (4)
                             
American Residential Services, LLC   Plumbing, heating   Junior secured loan   10.00% Cash, 2.00% PIK   4/1/2015         $ 19,685  
860 Ridge Lake Blvd A3-1860
Memphis, TN 38120
  and air-conditioning services                          
                             
AP Global Holdings, Inc.   Safety and security   Senior secured loan   4.75% (Libor + 4.50%/M)   10/26/2013         $ 7,110  
1043 North 47th Avenue
Phoenix, AZ 85043
  equipment manufacturer                          
                             
Apple & Eve, LLC and US Juice   Juice manufacturer   Senior secured loan   14.50% (Libor + 11.50%/M)   10/1/2013         $ 23,974  
Partners, LLC(19)       Senior secured loan   14.50% (Libor + 11.50%/M)   10/1/2013         $ 11,752  
2 Seaview Blvd       Senior secured revolving loan     10/1/2013         $ (5)
Port Washington, NY 11050       Senior units             8.74%   $ 3,500  
                             
Apogee Retail, LLC   For-profit thrift   Senior secured revolving loan     3/27/2012         $ (6)
1387 Cope Ave E   retailer   Senior secured loan   12.00% Cash, 4.00% PIK   11/28/2012         $ 11,296  
Maplewood, MN 55109       Senior secured loan   5.49% (Libor + 5.25%/M)   3/27/2012         $ 1,677  
        Senior secured loan   5.49% (Libor + 5.25%/M)   3/27/2012         $ 2,679  
        Senior secured loan   5.50% (Libor + 5.25%/M)   3/27/2012         $ 24,065  
        Senior secured loan   5.50% (Libor + 5.25%/M)   3/27/2012         $ 10,530  
                             
Arrow Group Industries, Inc.   Residential and   Senior secured loan   5.28% (Libor + 5.00%/Q)   4/1/2010         $ 5,223  
1680 Route 23 North
Wayne, NJ 07470
  outdoor shed manufacturer                          
                             
Athletic Club Holdings, Inc.   Premier health club   Senior secured loan   4.74% (Libor + 4.50%/M)   10/11/2013         $ 1,540  
5201 East Tudor Road   operator   Senior secured loan   4.75% (Libor + 4.50%/M)   10/11/2013         $ 880  
Anchorage, AL 99507       Senior secured loan   4.75% (Libor + 4.50%/M)   10/11/2013         $ 10,116  
        Senior secured loan   4.75% (Libor + 4.50%/M)   10/11/2013         $ 10,996  
        Senior secured loan   7.75% (Base Rate + 4.50%/Q)   10/11/2013         $ 4  
        Senior secured loan   6.75% (Base Rate + 3.50%/Q)   10/11/2013         $ 4  
                             
AWTP, LLC   Water treatment   Junior secured loan   11.50% (Base Rate + 8.25%/Q)   12/22/2012         $ 4,755  
2080 Lunt Avenue
Elk Grove Village, IL 60007
  services   Junior secured loan   11.50% (Base Rate + 8.25%/Q)   12/22/2012         $ 2,086  
                             
Best Brands Corporation   Baked goods   Senior secured loan   7.51% (Libor + 7.25%/M)   12/12/2012         $ 13,135  
1765 Yankee Doodle Road   manufacturer   Senior secured loan   7.51% (Libor + 7.25%/M)   6/30/2013         $ 8,759  
Eagan, MN 55121       Junior secured loan   12.00% Cash, 4.00% PIK   6/30/2013         $ 28,692  
        Junior secured loan   12.00% Cash, 4.00% PIK   6/30/2013         $ 8,611  
        Junior secured loan   12.00% Cash, 4.00% PIK   6/30/2013         $ 11,733  
                             
Booz Allen Hamilton, Inc.   Strategy and   Senior secured loan   7.50% (Libor + 4.50%/S)   7/31/2015         $ 743  
8283 Greensboro Drive   technology consulting   Senior subordinated loan   11.00% Cash, 2.00% PIK   7/31/2016         $ 22,400  
McLean, VA 22102   services   Senior subordinated loan   11.00% Cash, 2.00% PIK   7/31/2016         $ 250  
                             
Bumble Bee Foods, LLC and BB Co-Invest LP   Canned seafood   Senior subordinated loan   16.25% (12.00% Cash,   11/18/2018         $ 30,756  
9655 Granite Ridge Dr. Suite 100
San Diego, CA 92123
  manufacturer   Common stock   4.25% Optional PIK)         5.84%   $ 5,700  
                             
Campus Management Corp. and Campus   Education software   Senior secured loan   13.00% Cash, 3.00% PIK   8/8/2013         $ 3,280  
Management Acquisition Corp.(19)   developer   Senior secured loan   13.00% Cash, 3.00% PIK   8/8/2013         $ 30,494  
c/o Leeds Equity Partners, LLC       Senior secured loan   10.00% Cash, 3.00% PIK   8/8/2013         $ 9,028  
350 Park Avenue, 23rd Floor       Preferred stock   8.00% PIK         5.51%   $ 12,800  
New York, NY 10022                              
                             
Canon Communications LLC
11444 W. Olympic Blvd.
  Print publications services   Junior secured loan   13.75% (Libor + 8.75% Cash, 2.00% PIK/Q)   11/30/2011         $ 10,121  
Los Angeles, CA 90064       Junior secured loan   13.75% (Base Rate + 8.75% Cash, 2.00% PIK/Q)   11/30/2011         $ 10,314  
                             
Capella Healthcare, Inc.   Acute care hospital   Junior secured loan   13.00%   2/28/2016         $ 53,350  
Two Corporate Center, Suite 200   operator   Junior secured loan   13.00%   2/28/2016         $ 29,100  
501 Corporate Center Drive                              
Franklin, TN 37067                              
                             
Carador, PLC(19)   Investment company   Ordinary shares             5.08%   $ 2,311  
Georges Quay House                              
43 Townend Street                              
Dublin 2, Ireland                              
                             
CT Technologies Intermediate Holdings, Inc. and   Healthcare analysis   Preferred stock   14.00% PIK         20.00%   $ 7,055  
CT Technologies Holdings, LLC(19)   services   Common stock             5.90%   $ 8,134  
8901 Farrow Rd       Common stock             20.00%   $  
Columbia, SC 29203                              
                             

133


Company
  Industry   Investment   Interest(1)   Maturity   % of
Class
Held at
9-30-09
  Fair Value  
Charter Baking Company, Inc.   Baked goods   Senior subordinated note   13.00% PIK   2/6/2013         $ 5,874  
3300 Walnut Street   manufacturer   Preferred stock             3.05%   $ 1,725  
Unit C                              
Boulder, CO 80301                              
                             
CIC Flex, LP   Investment   Limited partnership units             14.28%   $ 41  
60 South Sixth Street, Suite 3720   partnership                          
Minneapolis, MN 55402                              
                             
Covestia Capital Partners, LP   Investment   Limited partnership interest             46.67%   $ 1,059  
11111 Santa Monica Blvd., Suite 1620   partnership                          
Los Angeles, CA 90025                              
                             
Courtside Acquisition Corp.   Community   Senior subordinated loan   17.00% PIK   6/29/2014         $  
1700 Broadway   newspaper publisher                          
New York, NY 10019                              
                             
Direct Buy Holdings, Inc. and Direct Buy   Membership-based   Senior secured loan   6.82% (Libor + 6.50%/M)   11/30/2012         $ 1,710  
Investors LP(19)
8450 Broadway
Merrillville, IN 46410
  buying club franchisor and operator   Partnership interests             19.31%   $ 2,500  
                             
Diversified Collection Services, Inc.   Collections services   Senior secured loan   9.50% (Libor + 6.75%/M)   8/4/2011         $ 10,529  
333 North Canyons Pkwy.       Senior secured loan   9.50% (Libor + 6.75%/M)   8/4/2011         $ 3,747  
Livermore, CA 94551       Senior secured loan   9.50% (Libor + 6.75%/Q)   8/4/2011         $ 323  
        Senior secured loan   9.50% (Libor + 6.75%/Q)   8/4/2011         $ 115  
        Senior secured loan   13.75% (Libor + 11.00%/Q)   2/4/2011         $ 1,931  
        Senior secured loan   13.75% (Libor + 11.00%/Q)   8/4/2011         $ 7,492  
        Preferred stock             0.68%   $ 264  
        Common stock             0.56%   $ 286  
                             
DSI Renal, Inc.   Dialysis provider   Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 103 (7)
511 Union Street Suite 1800       Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 2,992 (7)
Nashville, TN 37219       Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 952 (7)
        Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 979 (7)
        Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 1,360 (7)
        Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 2 (7)
        Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 15 (7)
        Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 21 (7)
        Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 46 (7)
        Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 14 (7)
        Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 17 (7)
        Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 250 (7)
        Senior secured revolving loan   5.30% (Libor + 5.00%/M)   3/31/2013         $ 37 (7)
        Senior secured loan   5.30% (Libor + 5.00%/M)   4/7/2014         $ 14,472  
        Senior subordinated note   16.00% PIK   4/7/2014         $ 49,263  
        Senior subordinated note   16.00% PIK   4/7/2014         $ 10,577  
                             
ELC Acquisition Corporation   Developer,   Senior secured loan   3.50% (Libor + 3.25%/M)   11/29/2012         $ 154  
2 Lower Ragsdale Drive
Monterey, CA 93940
  manufacturer and retailer of   Junior secured loan   7.25% (Libor + 7.00%/M)   11/29/2013         $ 7,917  
    educational products                          
                               
Emerald Performance Materials, LLC   Polymers and   Senior secured loan   8.25% (Libor + 4.25%/M)   5/22/2011         $ 8,657  
2020 Front Street, Suite 100   performance   Senior secured loan   8.25% (Libor + 4.25%/M)   5/22/2011         $ 515  
Cuyahoga Falls, OH 44221   materials   Senior secured loan   8.50% (Base Rate + 5.25%/M)   5/22/2011         $ 150  
    manufacturer   Senior secured loan   10.00% (Libor + 6.00%/M)   5/22/2011         $ 1,508  
        Senior secured loan   13.00% Cash, 3.00% PIK   5/22/2011         $ 4,704  
                             
Encanto Restaurants, Inc.   Restaurant owner   Junior secured loan   7.50% Cash, 3.50% PIK   8/2/2013         $ 20,299  
c/o Harvest Partners, Inc.   and operator   Junior secured loan   7.50% Cash, 3.50% PIK   8/2/2013         $ 3,867  
280 Park Avenue, 33rd Floor                              
New York, NY 10017                              
                             
FirstLight Financial Corporation(19)   Investment company   Senior subordinated loan   1.00% PIK   12/31/2016         $ 54,670  
1700 E. Putnum Ave.       Common stock             20.00%   $  
Old Greenwich, CT 06870       Common stock             100.00%   $  
                             
GCA Services Group, Inc.   Custodial services   Senior secured loan   12.00%   12/31/2011         $ 23,255  
1350 Euclid Ave, Suite 1500       Senior secured loan   12.00%   12/31/2011         $ 4,768  
Cleveland, OH 44115       Senior secured loan   12.00%   12/31/2011         $ 9,866  
                             
GG Merger Sub I, Inc.   Drug testing   Senior secured loan   4.30% (Libor + 4.00%/Q)   12/13/2014         $ 9,744  
4130 Parklake Avenue, Suite 400   services   Senior secured loan   4.30% (Libor + 4.00%/Q)   12/13/2014         $ 10,320  
Raleigh, NC 27612                              
                             

134


Company
  Industry   Investment   Interest(1)   Maturity   % of
Class
Held at
9-30-09
  Fair Value  
Growing Family, Inc. and GFH Holdings, LLC
3613 Mueller Road
  Photography services   Senior secured revolving loan   10.50% (Libor + 3.00% Cash, 4.00% PIK/A)   8/23/2011         $ 454 (8)
Saint Charles, MO 63301       Senior secured loan   13.00% (Libor + 3.50% Cash, 6.00% PIK/Q)   8/23/2011         $ 3,356  
        Senior secured loan   11.25% (Base Rate + 8.00%/A)   8/23/2011         $ 111  
        Senior secured loan   15.50% (Libor + 6.00% Cash, 6.00% PIK/Q)   8/23/2011         $ 1,073  
        Senior secured loan   15.50% (Libor + 6.00% Cash, 6.00% PIK/Q)   8/23/2011         $ 44  
        Common stock             8.43%   $  
                             
HB&G Building Products   Synthetic and wood   Senior subordinated loan   19.00% PIK   3/7/2011         $ 448  
P.O. Box 589   product manufacturer   Common stock             2.39%   $  
Troy, AL 36081       Warrants to purchase common stock             3.89%   $ (2)
                             
HCP Acquisition Holdings, LLC   Healthcare   Class A units             26.19%   $ 7,194  
c/o Halyard Capital Fund II, LP(20)
600 Fifth Avenue, 17th Floor
  compliance advisory services                          
New York, NY 10020                              
                             
Heartland Dental Care, Inc.   Dental services   Senior subordinated note   11.00% Cash, 3.25% PIK   7/30/2014         $ 32,717  
1200 Network Centre Drive, Suite 2                              
Effingham, IL 62401                              
                             
Dufry AG (fka Hudson Group, Inc. and Advent—Hudson, LLC)   Retail newstand operator   Common stock             0.67%   $ 2,200  
Hardstrasse 95                              
CH—4020 Basel                              
Switzerland                              
                             
ILC Industries, Inc.   Industrial products   Junior secured loan   11.50%   8/24/2012         $ 12,000  
105 Wilbur Place   provider                          
Bohemia, NY 11716                              
                             
Imperial Capital Group, LLC   Investment banking   Limited partnership interest             80.00%   $ 3,094  
and Imperial Capital Private Opportunities, LP(19)   services   Common units             5.00%   $ 20,000  
2000 Avenue of the Stars, 9th Floor S       Common units             5.00%   $ 3  
Los Angeles, CA 90067       Common units             4.99%   $  
                             
Industrial Container Services, LLC(19)   Industrial container   Senior secured revolving loan     9/30/2011         $ (9)
1540 Greenwood Avenue   manufacturer,   Senior secured loan   4.25% (Libor + 4.00%/M)   9/30/2011         $ 628  
Montebello, CA 90640   reconditioner and   Senior secured loan   4.25% (Libor + 4.00%/M)   9/30/2011         $ 41  
    servicer   Senior secured loan   4.29% (Libor + 4.00%/M)   9/30/2011         $ 4,680  
        Senior secured loan   4.29% (Libor + 4.00%/M)   9/30/2011         $ 306  
        Senior secured loan   4.28% (Libor + 4.00%/M)   9/30/2011         $ 5,850  
        Senior secured loan   4.28% (Libor + 4.00%/M)   9/30/2011         $ 382  
        Senior secured loan   4.25% (Libor + 4.00%/M)   9/30/2011         $ 93  
        Senior secured loan   4.25% (Libor + 4.00%/M)   9/30/2011         $ 1,420  
        Common stock             8.88%   $ 8,550  
                             
Innovative Brands, LLC   Consumer products   Senior secured loan   15.50%   9/22/2011         $ 9,059  
4729 East Union Hills Drive, Suite #103   and personal care   Senior secured loan   15.50%   9/22/2011         $ 8,362  
Phoenix, AZ 85050   manufacturer                          
                             
Instituto de Banca y Comercio, Inc.   Private school   Senior secured loan   8.50% (Libor + 6.00%/Q)   3/15/2014         $ 11,730  
Calle Santa Ana 1660   operator   Senior secured revolving loan   6.50% (Libor + 4.00%/Q)   3/15/2014         $ 1,232 (10)
Santurce, PR 00909-2309       Senior subordinated loan   13.00% Cash, 3.00% PIK   6/15/2014         $ 30,644  
        Preferred stock             3.11%   $ 1,883  
        Common stock             4.02%   $ 2,433  
        Preferred stock             4.00%   $ 1,596  
        Common stock             4.00%   $ 1,596  
                             
Investor Group Services, LLC(19)   Financial services   Senior secured revolving loan     6/22/2011         $ (11)
2020 Front Street, Suite 100
Boston, MA 02116
      Limited liability company membership interest             10.00%   $ 500  
                             
Ivy Hill Asset Management, L.P.(20)       Member interest             100.00%   $ 11,088  
2000 Avenue of the Stars, 12th Floor                              
Los Angeles, CA 90067                              
                             
Ivy Hill Middle Market Credit Fund, Ltd.(20)
2000 Avenue of the Stars, 12th Floor
  Investment company   Class B deferrable interest notes   6.72% (Libor + 6.00%/Q)   11/20/2018         $ 36,800  
Los Angeles, CA 90067       Subordinated notes             25.00%   $ 14,113  
                             
The Kenan Advantage Group, Inc.   Fuel transportation   Senior subordinated notes   9.50% Cash, 3.50% PIK   12/16/2013         $ 25,381  
4895 Dressler Road, N.W. #100   provider   Senior secured loan   3.00% (Libor + 2.75%/M)   12/16/2011         $ 2,238  
Canton, OH 44718       Preferred stock   8.00% PIK         1.15%   $ 1,459  
        Common stock             1.15%   $ 41  
                             

135


Company
  Industry   Investment   Interest(1)   Maturity   % of
Class
Held at
9-30-09
  Fair Value  
Lakeland Finance, LLC   Private school   Senior secured note   11.50%   12/15/2012         $ 30,000  
590 Peter Jefferson Parkway, Suite 30   operator   Senior secured note   11.50%   12/15/2012         $ 3,000  
Charlottesville, VA 22911                              
                             
LVCG Holdings LLC(20)   Commercial printer   Membership interests             56.53%   $ 1,980  
c/o The Decatur Group LLC                              
600 Seventeenth Street, Suite 2800                              
Denver, CO 80202                              
                             
Mactec, Inc.   Engineering and   Class B-4 stock             0.01%   $  
1105 Sanctuary Parkway, Suite 300
Alpharetta, GA 30004
  environmental services   Class C stock             38.47%   $ 150  
                             
Magnacare Holdings, Inc., Magnacare   Healthcare   Senior subordinated note   12.75% Cash, 2.00% PIK   1/30/2012         $ 4,646  
Administrative Services, LLC, and Magnacare, LLC   professional provider                          
825 East Gate Blvd.                              
Garden City, NY 11530                              
                             
Making Memories Wholesale, Inc.(20)   Scrapbooking   Senior secured loan   10.00% (Libor + 6.50%/Q)   8/21/2014         $ 9,875  
1168 West 500 North
Centerville, UT 84014
  branded products manufacturer   Senior secured loan   15.00% (7.50% Cash, 7.50% PIK/Q)   8/21/2014         $ 3,025  
        Senior secured revolving loan     3/31/2011         $ (12)
        Common stock             10.00%   $  
                             
MPBP Holdings, Inc., Cohr Holdings, Inc. and   Healthcare   Senior secured loan       1/31/2014         $ 489  
MPBP Acquisition Co., Inc.   equipment services   Junior secured loan   6.50% (Libor + 6.25%/B)   1/31/2014         $ 5,000  
21540 Plummer Street       Junior secured loan   6.50% (Libor + 6.25%/B)   1/31/2014         $ 3,000  
Chatsworth, CA 91311       Common stock             2.50%   $  
                             
MWD Acquisition Sub, Inc.   Dental services   Junior secured loan   6.49% (Libor + 6.25%/M)   5/3/2013         $ 4,350  
680 Hehli Way                              
PO Box 69                              
Mondovi, WI 54755                              
                             
National Print Group, Inc.   Printing   Senior secured revolving loan   8.25% (Base Rate + 5.00%/M)   3/2/2012         $ 166 (13)
2464 Amicola Highway   management services   Senior secured revolving loan   9.00% (Libor + 6.00%/S)   3/2/2012         $ 1,114 (13)
Chattanooga, TN 37406       Senior secured loan   16.00% (Base Rate + 9.00% Cash, 4.00% PIK/Q)   3/2/2012         $ 4,235  
        Senior secured loan   16.00% (Base Rate + 9.00% Cash, 4.00% PIK/M)   3/2/2012         $ 693  
        Preferred stock             5.17%   $  
                             
NPA Acquisition, LLC   Powersport vehicle   Junior secured loan   6.99% (Libor + 6.75%/M)   2/24/2013         $ 12,000  
c/o Transportation Resources Partners, L.P.   auction operator   Common units             1.94%   $ 2,300  
13175 Gregg Street                              
Poway, CA 92064                              
                             
OnCURE Medical Corp.   Radiation oncology   Senior secured loan   3.75% (Libor + 3.50%/M)   2/17/2012         $ 2,707  
610 Newport Center Drive, Suite 650   care provider   Senior subordinated note   11.00% Cash, 1.50% PIK   8/18/2013         $ 29,288  
Newport Beach, CA 92660       Common stock             3.38%   $ 3,000  
                             
OTG Management, Inc.
One International Plaza, Suite 130
  Airport restaurant operator   Junior secured loan   20.50% (Libor + 11.00% Cash, 6.50% PIK/M)   6/11/2013         $ 15,884  
Philadelphia, PA 19113       Warrants to purchase common stock             40.54%   $ 750 (2)
        Warrants to purchase common stock                 $ (2)
                             
Partnership Capital Growth Fund I, LP   Investment   Limited partnership interest             25.00%   $ 2,711  
One Embarcadero, Suite 3810   partnership                          
San Francisco, CA 94111                              
                             
Passport Health Communications, Inc., Passport   Healthcare   Senior secured loan   10.50% (Libor + 7.50%/M)   5/9/2014         $ 12,470  
Holding Corp. and Prism Holding Corp.   technology provider   Senior secured loan   10.50% (Libor + 7.50%/M)   5/9/2014         $ 11,511  
720 Cool Springs Blvd., Suite 450       Series A preferred stock             5.23%   $ 9,900  
Franklin, TN 37067       Common stock             5.23%   $ 100  
                             
PG Mergersub, Inc.   Provider of patient   Senior subordinated loan   12.50%   3/15/2016         $ 3,920  
c/o Vestar Capital Partners V, LP   surveys, management   Preferred stock             0.13%   $ 334  
245 Park Avenue, 41st Floor   reports and   Common stock             0.13%   $ 167  
New York, NY 10167   national databases for the integrated healthcare delivery system                          
                             

136


Company
  Industry   Investment   Interest(1)   Maturity   % of
Class
Held at
9-30-09
  Fair Value  
Pillar Holdings LLC and PHL Holding Co.(19)   Mortgage services   Senior secured revolving loan   5.80% (Libor + 5.50%/B)   11/20/2013         $ 375 (14)
220 Northpointe Parkway, Suite G       Senior secured revolving loan   5.80% (Libor + 5.50%/B)   11/20/2013         $ 938 (14)
Buffalo, NY 14228       Senior secured loan   14.50%   5/20/2014         $ 1,875  
        Senior secured loan   14.50%   5/20/2014         $ 5,500  
        Senior secured loan   5.80% (Libor + 5.50%/B)   11/20/2013         $ 16,902  
        Senior secured loan   5.80% (Libor + 5.50%/B)   11/20/2013         $ 10,550  
        Common stock             8.48%   $ 7,234  
                             
Planet Organic Health Corp.   Organic grocery   Junior secured loan   13.00%   7/3/2014         $ 817  
7917 - 104 Street   store operator   Junior secured loan   13.00%   7/3/2014         $ 9,737  
Edmonton Alberta Canada TGE 4E1       Senior subordinated loan   13.00% Cash, 4.00% PIK   7/3/2012         $ 9,873  
                             
Primis Marketing Group, Inc. and Primis   Database marketing   Senior subordinated note   13.50% Cash, 2.00% PIK   2/27/2013         $ 511  
Holdings, LLC(19)   services   Preferred units             8.02%   $  
c/o Pcap Managers, LLC       Common units             7.38%   $  
75 State Street, 26th Floor
Boston, MA 02109
                             
                             
Prommis Solutions, LLC, E-Default Services, LLC,   Bankruptcy and   Senior subordinated note   11.50% Cash, 2.00% PIK   2/23/2014         $ 25,866  
Statewide Tax and Title Services, LLC & Statewide   foreclosure   Senior subordinated note   11.50% Cash, 2.00% PIK   2/23/2014         $ 25,968  
Publishing Services, LLC (formerly known as   processing services   Preferred stock             3.17%   $ 6,221  
MR Processing Holding Corp.)                              
1544 Old Alabama Road                              
Roswell, GA 30076                              
                             
Qualitor, Inc.   Automotive   Senior secured loan   6.00% (Base Rate + 2.75%/M)   12/31/2011         $ 1,656  
24800 Denso Drive, Suite 255   aftermarkets   Junior secured loan   9.00% (Base Rate + 5.75%/M)   6/30/2012         $ 4,750  
Southfield, MI 48034   components supplier                          
                             
R2 Acquisition Corp.   Marketing services   Common stock             0.33%   $ 250  
Modern Media Building                              
207 NW Park Ave                              
Portland, OR 97209                              
                             
R3 Education, Inc. (formerly known as Equinox   Medical school   Senior secured revolving loan     12/31/2012         $ (15)
EIC Partners, LLC and MUA Management   operator   Senior secured loan   6.25% (Libor + 6.00%/M)   12/31/2012         $ 1,162  
Company, Ltd.)(19)       Senior secured loan   6.25% (Libor + 6.00%/M)   12/31/2012         $ 13,830  
1750 W. Broadway St. #222       Senior secured loan   6.25% (Libor + 6.00%/M)   12/31/2012         $ 7,130  
Oviedo, FL 32765       Common membership interest             22.19%   $ 17,185  
        Preferred stock             18.94%   $ 2,000  
        Preferred stock             6.56%   $ 200  
                             
RedPrairie Corporation   Software   Junior secured loan   6.97% (Libor + 6.50%/Q)   1/20/2013         $ 3,135  
c/o Francisco Partners   manufacturer   Junior secured loan   6.97% (Libor + 6.50%/Q)   1/20/2013         $ 11,400  
2882 Sand Hill Road, Suite 280                              
Menlo Park, CA 94045                              
                             
Reflexite Corporation(20)   Developer and   Senior subordinated loan   12.50% Cash, 5.50% PIK   2/27/2015         $ 16,557  
120 Darling Drive   manufacturer of   Common stock             39.49%   $ 24,898  
Avon, CT 06001   high-visibility reflective products                          
                             
Savers, Inc. and SAI Acquisition Corporation   For-profit thrift   Senior subordinated note   10.00% Cash, 2.00% PIK   8/11/2014         $ 5,923  
11400 SE 6th St. Suite 220   retailer   Senior subordinated note   10.00% Cash, 2.00% PIK   8/11/2014         $ 21,792  
Bellevue, WA 98004       Common stock             3.44%   $ 5,840  
                             
Saw Mill PCG Partners LLC   Precision   Common units             66.67%   $  
31005 Solon Road   components                          
Solon, OH 44139   manufacturer                          
                             
The Schumacher Group of Delaware, Inc.   Outsourced   Senior subordinated loan   11.125% Cash, 1.00% PIK   7/31/2012         $ 30,909  
200 Corporate Blvd., Suite 201   physician service   Senior subordinated loan   11.125% Cash, 1.00% PIK   7/31/2012         $ 5,229  
Lafayette, LA 70308   provider                          
                             
Shoes for Crews, LLC   Safety footwear and   Senior secured revolving loan     7/6/2010         $ (16)
1400 Centerpark Blvd., Suite 310   slip-related mat   Senior secured loan   5.50% (Base Rate + 2.25%/Q)   7/6/2010         $ 302  
West Palm Beach, FL 33401   manufacturer                          
                             
Sigma International Group, Inc.   Water treatment   Junior secured loan   15.00% (Libor + 7.00%/Q)   10/10/2013         $ 2,800  
700 Goldman Drive   parts manufacturer   Junior secured loan   15.00% (Libor + 7.00%/Q)   10/10/2013         $ 1,283  
Cream Ridge, NJ 08514       Junior secured loan   15.00% (Libor + 7.00%/Q)   10/10/2013         $ 1,925  
        Junior secured loan   15.00% (Libor + 7.00%/Q)   10/10/2013         $ 4,200  
        Junior secured loan   15.00% (Libor + 7.00%/Q)   10/10/2013         $ 1,400  
        Junior secured loan   15.00% (Libor + 7.00%/Q)   10/10/2013         $ 642  
                             
Summit Business Media, LLC   Business media   Junior secured loan   15.00% PIK   11/3/2013         $ 1,600  
375 Park Avenue   consulting services                          
New York, NY 10152-0002                              
                             

137


Company
  Industry   Investment   Interest(1)   Maturity   % of
Class
Held at
9-30-09
  Fair Value  
The Teaching Company, LLC and   Education   Senior secured loan   10.50%   9/29/2012         $ 18,000  
The Teaching Company Holdings, Inc.   publications   Senior secured loan   10.50%   9/29/2012         $ 10,000  
4151 Lafayette Center Drive, No. 100   provider   Preferred stock   8.00%         3.64%   $ 3,873  
Chantilly, VA 20151       Common stock             3.64%   $ 4  
                             
Thermal Solutions LLC and TSI Group, Inc.   Thermal   Senior secured loan   4.03% (Libor + 3.75%/M)   3/21/2011         $ 549  
94 Tide Mill Road   management and   Senior secured loan   4.53% (Libor + 4.25%/Q)   3/21/2012         $ 2,494  
Hampton, NH 03842   electronic packaging   Senior subordinated notes   11.50% Cash, 2.50% PIK   3/27/2012         $ 2,593  
    manufacturer   Senior subordinated notes   11.50% Cash, 2.75% PIK   9/28/2012         $ 2,042  
        Senior subordinated notes   11.50% Cash, 2.75% PIK   9/28/2012         $ 3,225  
        Preferred stock             1.31%   $ 716  
        Common stock             1.31%   $ 15  
                             
Things Remembered, Inc. and TRM Holdings   Personalized gifts   Senior secured loan   5.50%, 1.00% PIK Option   9/29/2012         $ 3,154  
Corporation   retailer   Senior secured loan   5.50%, 1.00% PIK Option   9/29/2012         $ 5,112  
5500 Avion Park Drive       Senior secured loan   5.50%, 1.00% PIK Option   9/29/2012         $ 19,882  
Highland Heights, OH 44143       Senior secured revolving loan     9/29/2012         $ (17)
        Preferred stock             3.50%   $  
        Common stock             2.98%   $  
        Preferred stock             3.20%   $  
        Warrants to purchase common shares             3.20%   $ (2)
                             
The Thymes, LLC(20)   Cosmetic products   Preferred stock   8.00% PIK         78.54%   $ 5,654  
629 9th Street SE   manufacturer   Common stock             55.45%   $  
Minneapolis, MN 55414                              
                             
Triad Laboratory Alliance, LLC   Laboratory services   Senior secured loan   8.50% (Libor + 5.50%/Q)   12/23/2011         $ 4,282  
4380 Federal Drive, Suite 100       Senior subordinated note   12.00% Cash, 1.75% PIK   12/23/2012         $ 15,068  
Greensboro, NC 27410                              
                             
Trivergance Capital Partners, LP   Investment   Limited partnership interest             100.00%   $ 1,672  
2200 Fletcher Avenue, 4th Floor   partnership                          
Fort Lee, NJ 07024                              
                             
TZ Merger Sub, Inc.   Computers and   Senior secured loan   7.50% (Libor + 4.50%/Q)   7/15/2015         $ 4,830  
567 San Nicolas Drive, Suite 360   electronics                          
Newport Beach, CA 92660                              
                             
UL Holding Co., LLC   Petroleum product   Senior secured loan   9.34% (Libor + 8.88%/Q)   12/24/2012         $ 10,726  
2824 N Ohio   manufacturer   Senior secured loan   14.00%   12/24/2012         $ 2,925  
Wichita, KS 67201       Senior secured loan   14.00%   12/24/2012         $ 2,925  
        Senior secured loan   14.00%   12/24/2012         $ 975  
        Senior secured loan   9.35% (Libor + 8.88%/Q)   12/24/2012         $ 2,925  
        Common units             0.85%   $ 500  
        Common units             0.86%   $  
                             
Universal Trailer Corporation(19)   Livestock and   Common stock             2.06%   $  
11590 Century Blvd., Suite 103   specialty trailer                          
Cincinnati, OH 45246   manufacturer                          
                             
Vistar Corporation and Wellspring   Food service   Senior subordinated loan   13.50%   5/23/2015         $ 41,444  
Distribution Corp.   distributor   Senior subordinated loan   13.50%   5/23/2015         $ 23,750  
12650 East Arapahoe Road       Senior subordinated loan   13.50%   5/23/2015         $ 4,750  
Centennial, CO 80112       Class A non-voting common stock             33.33%   $ 3,253  
                             
VOTC Acquisition Corp.   Radiation oncology   Senior secured loan   11.00% Cash, 2.00% PIK   7/31/2012         $ 17,329  
1500 Rosecrans Ave, Suite 400   care provider   Series E preferred shares             28.20%   $ 3,800  
Manhattan Beach, CA 90266                              
                             
VSC Investors LLC   Investment company   Membership interest             4.63%   $ 635  
401 Vance Street                              
                             
VSS-Tranzact Holdings, LLC(19)   Management   Common membership             8.51%   $ 6,000  
350 Park Avenue   consulting services   interest                      
New York, NY 10022                              
                             
Waste Pro USA, Inc.   Waste management   Class A Common Equity             2.61%   $ 13,263  
2101 West State Road 434, Suite 315   services                          
Longwood, FL 32779                              
                             
Wastequip, Inc.(19)   Waste management   Senior subordinated loan   10.00% Cash, 2.50% PIK   2/5/2015         $ 3,936  
25800 Science Park Drive, Suite 140   equipment   Common stock             5.34%   $  
Beachwood, OH 44122   manufacturer                          
                             
Wear Me Apparel, LLC(19)   Clothing   Senior subordinated notes   17.50% PIK   4/2/2013         $ 18,083  
31 W 34th Street   manufacturer   Common stock             12.30%   $  
New York, NY 10001-3009                              
                             

138


Company
  Industry   Investment   Interest(1)   Maturity   % of
Class
Held at
9-30-09
  Fair Value  
Web Services Company, LLC   Laundry service   Senior secured loan   5.30% (Libor + 5.00%/Q)   8/28/2014         $ 4,802  
3690 Redondo Beach Ave.   and equipment   Senior subordinated loan   11.50% Cash, 2.50% PIK   8/29/2016         $ 17,198  
Redondo Beach, CA 90278   provider   Senior subordinated loan   11.50% Cash, 2.50% PIK   8/29/2016         $ 24,358  
                             
Wyle Laboratories, Inc. and Wyle Holdings, Inc.   Provider of   Junior secured loan   15.00%   7/17/2014         $ 16,000  
1960 E. Grand Ave., Suite 900   specialized   Junior secured loan   15.00%   7/17/2014         $ 12,000  
El Segundo, CA 90245-5023   engineering,   Senior preferred stock   10.00% PIK         0.77%   $ 77  
    scientific and   Junior preferred stock   8.00% PIK         0.77%   $ 1,455  
    technical services   Common stock             0.72%   $ 148  
                             
X-rite, Incorporated   Artwork software   Junior secured loan   14.38% (Libor + 10.38%/Q)   7/31/2013         $ 3,116  
3100 44th Street SW   manufacturer   Junior secured loan   14.38% (Libor + 10.38%/Q)   7/31/2013         $ 7,790  
Grandville, MI 49418                              
                             
Total                         $ 1,967,724  
                             

(1)
All interest is payable in cash unless otherwise indicated. A majority of the variable rate loans to our portfolio companies bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower's option, which resets daily (D), monthly (M), bi-monthly (B), quarterly (Q) or semi-annually (S). For each such loan, we have provided the current interest rate in effect as of September 30, 2009.

(2)
Percentages shown for warrants or convertible preferred stock held represents the percentages of common stock we may own on a fully diluted basis, assuming we exercise our warrants or convert our preferred stock to common stock.

(3)
$1,582 of total commitment of $5,000 for the revolver remains unfunded as of September 30, 2009.

(4)
Total commitment of $1,967 remains unfunded as of September 30, 2009.

(5)
Total commitment of $10,000 remains unfunded as of September 30, 2009.

(6)
Total commitment of $7,802 remains unfunded as of September 30, 2009.

(7)
Total commitment of $8,134 remains unfunded as of September 30, 2009.

(8)
$0 of total commitment of $2,500 remains unfunded as of September 30, 2009.

(9)
$12,907 of total commitment of $15,696 remains unfunded as of September 30, 2009.

(10)
$3,191 of total commitment of $11,500 remains unfunded as of September 30, 2009.

(11)
Total commitment of $2,500 remains unfunded as of September 30, 2009.

(12)
Total commitment of $2,500 remains unfunded as of September 30, 2009

(13)
$0 of total commitment of $4,109 remains unfunded as of September 30, 2009.

(14)
$2,033 of total commitment of $3,750 remains unfunded as of September 30, 2009.

(15)
Total commitment of $25,000 remains unfunded as of September 30, 2009

(16)
Total commitment of $5,833 remains unfunded as of September 30, 2009

(17)
Total commitment of $5,000 remains unfunded as of September 30, 2009.

(18)
$3,371 of total commitment of $10,209 remains unfunded as of September 30, 2009.

(19)
As defined in the Investment Company Act, we are an "Affiliate" of this portfolio company because we own 5% or more of the portfolio company's outstanding voting securities.

(20)
As defined in the Investment Company Act, we are an "Affiliate" of this portfolio company because we own 5% or more of the portfolio company's outstanding voting securities or we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). In addition, as defined in the Investment Company Act, we "Control" this portfolio company because we own more than 25% of the portfolio company's outstanding voting securities or we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement).

139



MANAGEMENT

              Our business and affairs are managed under the direction of our board of directors. The responsibilities of the board of directors include, among other things, the quarterly valuation of our assets. The board of directors currently consists of seven members, four of whom are not "interested persons" of Ares Capital as defined in Section 2(a)(19) of the Investment Company Act. We refer to these individuals as our independent directors. Our board of directors elects our officers, who will serve at the discretion of the board of directors. The board of directors maintains an audit committee and nominating committee, and may establish additional committees from time to time as necessary.

EXECUTIVE OFFICERS AND BOARD OF DIRECTORS

              Under our charter and bylaws, our directors are divided into three classes. Directors are elected for staggered terms of three years each, with the term of office of only one of these three classes of directors expiring each year. Each director will hold office for the term to which he or she is elected and until his or her successor is duly elected and qualifies.

Directors

              Information regarding the board of directors is as follows:

Name
  Age   Position   Director
Since
  Expiration
of Term
 

Independent Directors

                       
 

Douglas E. Coltharp

    48   Director     2004     2011  
 

Frank E. O'Bryan

    76   Director     2005     2010  
 

Gregory W. Penske

    47   Director     2009     2012  
 

Eric B. Siegel

    51   Director     2004     2010  

Interested Directors

                       
 

Michael J. Arougheti

    37   President and Director     2009     2011  
 

Robert L. Rosen

    63   Director     2004     2012  
 

Bennett Rosenthal

    46   Chairman and Director     2004     2012  

              The address for each director is c/o Ares Capital Corporation, 2000 Avenue of the Stars, 12th Floor, Los Angeles, California 90067.

Executive Officers Who Are Not Directors

              Information regarding our executive officers who are not directors is as follows:

Name
  Age   Position

Joshua M. Bloomstein

    36   Vice President, General Counsel and Assistant Secretary

Richard S. Davis

    50   Chief Financial Officer

Merritt S. Hooper

    48   Secretary and Assistant Treasurer

Daniel F. Nguyen

    37   Treasurer

Karen A. Tallman

    52   Chief Compliance Officer

Michael D. Weiner

    57   Vice President

              The address for each executive officer is c/o Ares Capital Corporation, 2000 Avenue of the Stars, 12th Floor, Los Angeles, California 90067.

140


Biographical Information

Directors

              Our directors have been divided into two groups—interested directors and independent directors. Interested directors are "interested persons" as defined in the Investment Company Act.

Independent Directors

              Douglas E. Coltharp, 48, has served as a director of the Company since 2004. Since May 2007, Mr. Coltharp has been a partner at Arlington Capital Advisors and Arlington Investment Partners, Birmingham, AL-based financial advisory and private equity businesses. Prior to that, from November 1996 to May 2007, he was the Executive Vice President and Chief Financial Officer of Saks Incorporated and its predecessor organization (NYSE "SKS"). Prior to joining Saks Incorporated, Mr. Coltharp spent ten years in the Corporate Finance Department of NationsBank (now known as Bank of America), most recently as Senior Vice President and head of the Southeast Corporate Finance Group headquartered in Atlanta. Mr. Coltharp holds a BS in Finance and Economics from Lehigh University in Bethlehem, Pennsylvania and an MBA from the Wharton School, University of Pennsylvania, in Philadelphia, Pennsylvania. Mr. Coltharp also serves on the board of directors of Under Armour, Inc. (NYSE "UA").

              Frank E. O'Bryan, 76, has served as a director of the Company since 2005. Mr. O'Bryan served as Chairman of the Board of WMC Mortgage Company from 1997 to 2003 and as a Vice Chairman until 2004, when the company was sold to General Electric Corporation. Mr. O'Bryan served as Vice Chairman of Shearson/American Express Mortgage Corp. (formerly Western Pacific Financial) and as a Director of Shearson American Express from 1981 to 1985 and prior to that served as a Director and senior executive of Shearson Hayden Stone from 1979 to 1981. Mr. O'Bryan holds a BS in Business from the University of Arizona. Mr. O'Bryan has been a Director of The First American Corporation since 1994. Mr. O'Bryan is a past member of the boards of directors of Damon Corporation, Grubb & Ellis, Standard Pacific Corporation and Farmers & Merchants Bank.

              Gregory W. Penske, 47, has served as a director of the Company since February 2009. Mr. Penske has served as President and CEO of Penske Motor Group, Inc, an automotive group that owns and operates Toyota, Lexus and Scion dealerships in California, since 1993. Mr. Penske was the former President and CEO of Penske Motorsports, Inc., which operated racetracks across the country. Penske Motorsports, Inc. was publicly traded on the NASDAQ exchange and was thereafter sold to International Speedway Corporation in 1999. Mr. Penske serves as a member of the boards of directors for Penske Corporation, the Los Angeles Sports Council and Friends of Golf, Inc., and is on the Board of Trustees for the John Thomas Dye School. He is a member of the Toyota Parts and Service Advisory Council, the Toyota President's Cabinet and the Toyota Board of Governors. Mr. Penske is also a former member of the boards of directors of the Alltel Corporation, International Speedway Corporation and the Southern California Committee for the Olympic Games. Mr. Penske holds a BS in Business from Cornell University.

              Eric B. Siegel, 51, has served as a director of the Company since 2004. Since 1995, Mr. Siegel has been an independent business consultant providing advice through a limited liability company owned by Mr. Siegel, principally with respect to acquisition strategy and structuring, and the subsequent management of acquired entities. Mr. Siegel is currently a member of the Advisory Board of and consultant to the Milwaukee Brewers Baseball Club and a Director and Chairman of the Executive Committee of El Paso Electric Company, a NYSE publicly traded utility company. Mr. Siegel is also a past member of the boards of directors of a number of public companies, including Kerzner International Ltd. until it went private in 2006. Mr. Siegel rejoined the board of Kerzner International Ltd., currently a private company, in 2008. Mr. Siegel is a retired limited partner of Apollo Advisors, L.P. and Lion Advisors, L.P. Mr. Siegel is also a member of the Board of Trustees of the Marlborough School, a member of the board of directors of the Friends of the Los Angeles Free

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Clinic and a board member of Reprise Theatre Company, a non-profit theatre organization. Mr. Siegel holds his BA summa cum laude and Phi Beta Kappa and JD Order of the Coif from the University of California at Los Angeles.

Interested Directors

              Michael J. Arougheti, 37, serves as President of the Company and became a director of the Company in February 2009. Mr. Arougheti joined Ares Management in May 2004 and is a Founding Member of Ares. Mr. Arougheti is also a Partner in the Private Debt Group of Ares and is a Partner of Ares Capital Management, our investment adviser. In addition, Mr. Arougheti serves as a member of the Investment Committee of Ares Capital Management and of the Investment Committee for the Ares European Private Debt Group. From 2001 to 2004, Mr. Arougheti was employed by Royal Bank of Canada, where he was a Managing Partner of the Principal Finance Group of RBC Capital Partners and a member of the firm's Mezzanine Investment Committee. At RBC Capital Partners, Mr. Arougheti oversaw an investment team that originated, managed and monitored a diverse portfolio of middle market leveraged loans, senior and junior subordinated debt, preferred equity and common stock, as well as warrants on behalf of RBC and other third-party institutional investors. Mr. Arougheti joined Royal Bank of Canada in October 2001 from Indosuez Capital, where he was a Principal, responsible for originating, structuring and executing leveraged transactions across a broad range of products and asset classes. Mr. Arougheti sat on the firm's Investment Committee and was also active in the firm's private equity fund investment and its fund of funds program. Prior to joining Indosuez in 1994, Mr. Arougheti worked at Kidder, Peabody & Co., where he was a member of the firm's Mergers and Acquisitions Group, advising clients in various industries, including natural resources, pharmaceuticals and consumer products. Mr. Arougheti has extensive experience in leveraged finance, including senior bank loans, mezzanine debt and private equity. He has worked on a range of transactions for companies in the consumer products, manufacturing, healthcare, retail and technology industries. Mr. Arougheti also serves on the boards of directors of Reflexite Corporation, Investor Group Services, HCPro, Inc. and Riverspace Arts, a not-for-profit arts organization. Mr. Arougheti received a BA in Ethics, Politics and Economics, cum laude, from Yale University. Mr. Arougheti is an "interested person" of the Company as defined in Section 2(a)(19) of the Investment Company Act because he is the President of the Company, is on the investment committee of Ares Capital Management, the Company's investment adviser, and is a member of Ares Partners Management Company LLC, the parent of Ares Management LLC, the managing member of the investment adviser.

              Robert L. Rosen, 63, has served as a director of the Company since 2004. From 1987 to present, Mr. Rosen has been CEO of RLR Partners, LLC, a private investment firm with interests in financial services, healthcare media and multi-industry companies. In 1998, Mr. Rosen founded National Financial Partners ("NFP"), an independent distributor of financial services to high net worth individuals and small to medium-sized corporations. He served as NFP's CEO from 1998 to 2000 and as its Chairman until January 2002. From 1989 to 1993, Mr. Rosen was Chairman and CEO of Damon Corporation, a leading healthcare and laboratory testing company that was ultimately sold to Quest Diagnostics. From 1983 to 1987, Mr. Rosen was Vice Chairman of Maxxam Group. Prior to that, Mr. Rosen spent twelve years at Shearson American Express in positions in research, investment banking and senior management, and for two years was Assistant to Sanford Weill, the then Chairman and CEO of Shearson. Mr. Rosen holds an MBA in finance from NYU's Stern School. Mr. Rosen is an "interested person" of the Company as defined in Section 2(a)(19) of the Investment Company Act because he has entered into a strategic advisory relationship with Ares and an affiliate of the Company owns limited partner interests in a fund controlled by Mr. Rosen.

              Bennett Rosenthal, 46, has served as Chairman of the Company's board of directors since 2004. Mr. Rosenthal joined Ares Management in 1998 and is a Founding Member of Ares and a Senior Partner in the Private Equity Group. Mr. Rosenthal also serves on the Investment Committee of Ares Capital Management. Prior to joining Ares, Mr. Rosenthal was Managing Director in the Global Leveraged Finance Group of Merrill Lynch and was responsible for originating, structuring and

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negotiating leveraged loan and high yield financings. Mr. Rosenthal was also a senior member of Merrill Lynch's Leveraged Transaction Commitment Committee. Mr. Rosenthal is a member of the following boards of directors: AmeriQual Management, Inc., Aspen Dental Management, Inc., Douglas Dynamics, LLC, Hanger Orthopedic Group, Inc. and National Bedding Company LLC (Serta). Mr. Rosenthal graduated summa cum laude with a BS in Economics from the University of Pennsylvania's Wharton School of Business where he also received his MBA with distinction. Mr. Rosenthal is an "interested person" of the Company as defined in Section 2(a)(19) of the Investment Company Act because he is on the investment committee of Ares Capital Management, the Company's investment adviser, and is a member of Ares Partners Management Company LLC, the parent of Ares Management, the managing member of the investment adviser.

Executive Officers Who Are Not Directors

              Joshua M. Bloomstein, 36, serves as the General Counsel of Ares Capital. He joined Ares Management in November 2006 and currently serves as the Deputy General Counsel of Ares Management. From January 2005 to October 2006, Mr. Bloomstein was an associate with Latham & Watkins LLP specializing in leveraged buyouts and private equity investments as well as general partnership and corporate matters. Mr. Bloomstein graduated magna cum laude with a BA in Political Science from the State University of New York at Albany and received a JD degree, magna cum laude, from the University of Miami School of Law.

              Richard S. Davis, 51, serves as Chief Financial Officer of the Company. He joined Ares Management in June 2006 as Executive Vice President Finance. From December 1997 to May 2006, Mr. Davis was with Arden Realty, Inc., a real estate investment trust and formerly the largest publicly traded owner in Southern California, serving as its Executive Vice President, Chief Financial Officer since July 2000. From 1996 to 1997, Mr. Davis was with Catellus Development Corporation, where he was responsible for accounting and finance for the asset management and development divisions. From 1985 to 1996, Mr. Davis served as a member of the audit staff of both KPMG LLP and Price Waterhouse LLP. Mr. Davis is a Certified Public Accountant and a member of the American Institute of CPAs. Mr. Davis received a BS in Accounting from the University of Missouri at Kansas City.

              Merritt S. Hooper, 48, serves as Secretary and Assistant Treasurer of the Company. From July 2004 to March 2007, Ms. Hooper served as Treasurer of the Company and, from July 2004 to May 2007, as Vice President of Investor Relations of the Company. Ms. Hooper has been with Ares since its founding and is the Senior Vice President and Director of Investor Relations/Marketing for all Ares funds as well as a senior investment analyst in the Capital Markets Group. Prior to Ares, Ms. Hooper worked at Lion Advisors (an affiliate of Apollo Management L.P.) from 1991 to 1997 as a senior credit analyst participating in both portfolio management and strategy. From 1987 until 1991, Ms. Hooper was with Columbia Savings and Loan, most recently as Vice President in the Investment Management Division. Ms. Hooper serves on the executive and investment boards of Cedars-Sinai Medical Center in Los Angeles. Ms. Hooper graduated from the University of California at Los Angeles with a BA in Mathematics and received her MBA in Finance from UCLA's Anderson School of Management.

              Daniel F. Nguyen, 38, serves as the Treasurer of the Company. He joined Ares Management in August 2000 and currently serves as an Executive Vice President and the Chief Financial Officer of Ares Management. From 1996 to 2000, Mr. Nguyen was with Arthur Andersen LLP, where he was in charge of conducting business audits on numerous financial clients, performing due diligence investigation of potential mergers and acquisitions, and analyzing changes in accounting guidelines for derivatives. At Arthur Andersen LLP, Mr. Nguyen also focused on treasury risk management and on mortgage-backed securities and other types of structured financing. Mr. Nguyen graduated with a BS in Accounting from the University of Southern California's Leventhal School of Accounting and received an MBA in Global Business from Pepperdine University's Graziadio School of Business and Management. Mr. Nguyen also studied European Business at Oxford University as part of the MBA curriculum. Mr. Nguyen is a Chartered Financial Analyst and a Certified Public Accountant.

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              Karen A. Tallman, 52, serves as Chief Compliance Officer of the Company and joined Ares Management in June 2007. From April 2006 to June 2007, Ms. Tallman acted as counsel to Ares Management. Prior to joining Ares, Ms. Tallman was General Counsel of Continuum Commerce LLC, a direct response marketing firm. From 1997 to 2002, Ms. Tallman was General Counsel and Secretary of Merisel, Inc., a NASDAQ-listed computer products distributor, and served as Senior Vice President beginning in 2001. From 1992 to 1997, Ms. Tallman was employed by CB Commercial Real Estate Group, Inc., most recently in the positions of Vice President, Secretary and Senior Counsel. Previously, Ms. Tallman was a corporate attorney for nine years at the law firm of Skadden, Arps, Slate, Meagher & Flom LLP. Ms. Tallman graduated magna cum laude with a BA in Economics and Political Science from Miami University and received a JD with highest honors from George Washington University.

              Michael D. Weiner, 57, serves as Vice President of the Company. Mr. Weiner is also General Counsel of Ares Management. Mr. Weiner joined Ares Management in September 2006 and is a member of Ares. Previously, Mr. Weiner served as General Counsel to Apollo Management L.P. and had been an officer of the corporate general partners of Apollo since 1992. Prior to joining Apollo, Mr. Weiner was a partner in the law firm of Morgan, Lewis & Bockius specializing in corporate and alternative financing transactions, securities law as well as general partnership, corporate and regulatory matters. Mr. Weiner has served and continues to serve on the boards of directors of several corporations, including Hughes Communications, Inc. and SkyTerra Communications, Inc. Mr. Weiner also serves on the Board of Governors of the Cedars Sinai Medical Center in Los Angeles. Mr. Weiner graduated with a BS in Business and Finance from the University of California at Berkeley and a JD from the University of Santa Clara.

INVESTMENT COMMITTEE

              Information regarding the members of Ares Capital Management's investment committee is as follows:

Name
  Age   Position

Michael J. Arougheti

    37   President and Director of the Company,
Member of Investment Committee

Eric B. Beckman

    43   Member of Investment Committee,
Portfolio Manager

R. Kipp deVeer

    37   Member of Investment Committee,
Portfolio Manager

Mitchell Goldstein

    42   Member of Investment Committee,
Portfolio Manager

John Kissick

    68   Member of Investment Committee

Antony P. Ressler

    49   Member of Investment Committee

Bennett Rosenthal

    46   Chairman and Director of the Company,
Member of Investment Committee

David Sachs

    50   Member of Investment Committee

Michael L. Smith

    38   Member of Investment Committee,
Portfolio Manager

              The address for each member of Ares Capital Management's investment committee is c/o Ares Capital Corporation, 2000 Avenue of the Stars, 12th Floor, Los Angeles, California 90067.

Members of Ares Capital Management's Investment Committee Who Are Not Directors or Officers of the Company

              Eric B. Beckman—Mr. Beckman joined Ares Management in 1998 and serves as a Partner in the Private Debt Group of Ares Management and a member of the Investment Committee of Ares

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Capital Management. Before joining the Private Debt Group, he served as a Partner in the Private Equity Group focusing on mezzanine and special situation investments. While at Ares Management, he has been responsible for originating, structuring and managing investments in senior loans, mezzanine debt, private equity and distressed securities across a number of industries. Mr. Beckman joined Ares from Goldman, Sachs & Co. where he specialized in leveraged loan and high yield bond financings. While at Goldman Sachs, he was also involved in raising and managing the West Street Bridge Loan Fund, and in certain restructuring advisory and distressed lending activities. Earlier in his career he worked in the Office of the Mayor and for the City Council of New York. Mr. Beckman is the chair of the Los Angeles Advisory Committee and a member of the national board of directors of the Posse Foundation, a college access program for inner city youth. He graduated summa cum laude with a BA in Political Theory and Economics from Cornell University, and received his JD from the Yale Law School where he was a senior editor of the Yale Law Journal.

              R. Kipp deVeer—Mr. deVeer joined Ares Management in May 2004 and serves as a Partner in the Private Debt Group of Ares Management and a member of the Investment Committee of Ares Capital Management. Prior to joining Ares Management, Mr. deVeer was a partner at RBC Capital Partners, a division of Royal Bank of Canada, which led the firm's middle market financing and principal investment business. Mr. deVeer joined RBC in October 2001 from Indosuez Capital, where he was Vice President in the Merchant Banking Group. Mr. deVeer has also worked at J.P. Morgan and Co., both in the Special Investment Group of J.P. Morgan Investment Management, Inc. and the Investment Banking Division of J.P. Morgan Securities Inc. Mr. deVeer received a BA from Yale University and an MBA from Stanford University's Graduate School of Business.

              Mitchell Goldstein—Mr. Goldstein joined Ares Management in May 2005 and serves as a Partner in the Private Debt Group of Ares Management and a member of the Investment Committee of Ares Capital Management. Prior to joining Ares Management, Mr. Goldstein worked at Credit Suisse First Boston, where he was a Managing Director in the Financial Sponsors Group. At CSFB, Mr. Goldstein was responsible for providing investment banking services to private equity funds and hedge funds with a focus on M&A and restructurings as well as capital raisings, including high yield, bank debt, mezzanine debt, and IPOs. Mr. Goldstein joined CSFB in 2000 at the completion of the merger with Donaldson, Lufkin & Jenrette. From 1998 to 2000, Mr. Goldstein was at Indosuez Capital, where he was a member of the Investment Committee and a Principal, responsible for originating, structuring and executing leveraged transactions across a broad range of products and asset classes. From 1993 to 1998, Mr. Goldstein worked at Bankers Trust, where he was responsible for financing and advising clients in various industries including media and telecommunications, consumer products, automotive and healthcare. Mr. Goldstein graduated summa cum laude from the State University of New York at Binghamton with a BS in Accounting, received an MBA from Columbia University's Graduate School of Business and is a Certified Public Accountant.

              John Kissick—Mr. Kissick has been with Ares Management since its founding in 1997 and serves as a Senior Advisor to the Capital Markets Group of Ares Management and as a member of the Investment Committee of Ares Capital Management and all Ares funds. He is also a Founding Member of Ares and a Senior Partner in the Private Equity Group. Prior to Ares, Mr. Kissick was a co-founder of Apollo Management, L.P. in 1990 and was a member of Apollo's original six-member management team. Together with Antony Ressler, Mr. Kissick oversaw and led the activities of Apollo Management, L.P. and Lion Advisors, L.P., an affiliate of Apollo Management L.P., from 1990 until 1997, with a focus on high yield bonds, leveraged loans and other fixed income assets. Prior to 1990, Mr. Kissick served as a Senior Executive Vice President of Drexel Burnham Lambert, where he began in 1975, eventually heading its Corporate Finance Department. Mr. Kissick serves on the boards of the Cedars-Sinai Medical Center in Los Angeles, the Stanford University Graduate School of Business and Athletic Department as well as Mentor LA, which helps economically disadvantaged children graduate from high school through a variety of mentoring and other programs. Mr. Kissick graduated from Yale

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University with a BA in Economics and with highest honors from the Stanford Business School with an MBA in Finance.

              Antony P. Ressler—Mr. Ressler has been with Ares Management since its founding in 1997 and is a Founding Member of Ares and a Senior Partner in the Private Equity Group. He serves as a Senior Advisor to the Capital Markets Group of Ares Management and as a member of the Investment Committee of Ares Capital Management and all Ares Private Equity funds. Prior to Ares, Mr. Ressler was a co-founder of Apollo Management, L.P. in 1990 and was a member of Apollo's original six-member management team. Together with Mr. Kissick, Mr. Ressler oversaw and led the capital markets activities of Apollo Management, L.P. and Lion Advisors, L.P. from 1990 until 1997, with a focus on high yield bonds, leveraged loans and other fixed income assets. Prior to 1990, Mr. Ressler served as a Senior Vice President in the High Yield Bond Department of Drexel Burnham Lambert, with responsibility for the New Issue/Syndicate Desk. Mr. Ressler serves on several boards of directors including Kinetics Holdings LLC, National Bedding Company LLC (Serta) and WCA Waste Corporation. Mr. Ressler also is a member of the Board of Trustees of the Center for Early Education, the Los Angeles County Museum of Art, the Alliance for College Ready Public Schools, the Small School Alliance, the Asia Society of Southern California and is involved in the U.S. Chapter of Right to Play (formerly known as Olympic Aid), an international humanitarian organization that is committed to improving the lives of the most disadvantaged children through sports and play, currently operating in over 20 countries worldwide. Mr. Ressler is also one of the founding members of the board of directors of the Painted Turtle Camp, a $40 million southern California-based facility created to serve children dealing with chronic and life threatening illnesses by creating memorable, old-fashioned camping experiences. Mr. Ressler received his BSFS from Georgetown University's School of Foreign Service and his MBA from Columbia University's Graduate School of Business.

              David Sachs—Mr. Sachs has been with Ares Management since its founding in 1997 and is a Founding Member of Ares, a Senior Partner in the Ares Capital Markets Group and serves as a member of the Investment Committee of Ares Capital Management and all Ares funds. From 1994 until 1997, Mr. Sachs was a principal of Onyx Partners, Inc. specializing in merchant banking and related capital raising activities in the private equity and mezzanine debt markets. From 1990 to 1994, Mr. Sachs was employed by Taylor & Co., an investment manager providing investment advisory and consulting services to members of the Bass Family of Fort Worth, Texas. From 1984 to 1990, Mr. Sachs was with Columbia Savings and Loan Association, most recently as Executive Vice President, responsible for all asset-liability management as well as running the Investment Management Department. Mr. Sachs serves on the board of directors of Terex Corporation. Mr. Sachs graduated from Northwestern University with a BS in Industrial Engineering and Management Science.

              Michael L. Smith—Mr. Smith joined Ares Management in May 2004 and serves as a Partner in the Private Debt Group of Ares Management and a member of the Investment Committee of Ares Capital Management. Prior to joining Ares Management, Mr. Smith was a Partner at RBC Capital Partners, a division of Royal Bank of Canada, which led the firm's middle market financing and principal investment business. Mr. Smith joined RBC in October 2001 from Indosuez Capital, where he was a Vice President in the Merchant Banking Group. Previously, Mr. Smith worked at Kenter, Glastris & Company, a private equity investment firm specializing in leveraged management buyouts, and at Salomon Brothers Inc., in their Debt Capital Markets Group and Financial Institutions Group. Mr. Smith received a BS in Business Administration, cum laude, from the University of Notre Dame and a Masters in Management from Northwestern University's Kellogg Graduate School of Management.

COMMITTEES OF THE BOARD OF DIRECTORS

              Our board of directors has established an audit committee and a nominating committee. We do not have a compensation committee because our executive officers do not receive any direct compensation from us. During 2009, the board of directors held twenty-one formal meetings, the audit

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committee held five formal meetings and the nominating committee held four formal meetings. We encourage, but do not require, the directors to attend our annual meeting of stockholders.

Audit Committee

              The members of the audit committee are Messrs. Coltharp, O'Bryan and Siegel, each of whom is independent for purposes of the Investment Company Act and The NASDAQ Global Select Market corporate governance regulations. Mr. Coltharp serves as chairman of the audit committee. The board of directors has adopted a charter for the audit committee, which is available on our website at www.arescapitalcorp.com. The audit committee is responsible for approving our independent accountants, reviewing with our independent accountants the plans and results of the audit engagement, approving professional services provided by our independent accountants, reviewing the independence of our independent accountants and reviewing the adequacy of our internal accounting controls. The audit committee is also responsible for aiding our board of directors in fair value pricing debt and equity securities that are not publicly traded or for which current market values are not readily available. The audit committee also currently receives input from independent valuation firms that have been engaged at the direction of the board to value certain portfolio investments.

Nominating Committee

              The members of the nominating committee are Messrs. Coltharp, O'Bryan and Siegel, each of whom is independent for purposes of the Investment Company Act and The NASDAQ Global Select Market corporate governance regulations. Mr. Siegel serves as chairman of the nominating committee. Our board of directors has adopted a charter for the nominating committee, which is available on our website at www.arescapitalcorp.com. The nominating committee is responsible for selecting, researching and nominating directors for election by our stockholders, selecting nominees to fill vacancies on the board or a committee of the board, developing and recommending to the board a set of corporate governance principles and overseeing the evaluation of the board and our management.

              The nominating committee may consider recommendations for nomination of directors from our stockholders. Nominations made by stockholders must be delivered to or mailed (setting forth the information required by our bylaws) and received at our principal executive offices not earlier than 150 days nor fewer than 120 days in advance of the first anniversary of the date on which we first mailed our proxy materials for the previous year's annual meeting of stockholders; provided, however, that if the date of the annual meeting has changed by more than 30 days from the prior year, the nomination must be received not earlier than the 150th day prior to the date of such annual meeting nor later than the later of (a) the 120th day prior to the date of such annual meeting or (b) the 10th day following the day on which public announcement of such meeting date is first made.

Compensation Committee

              We do not have a compensation committee because our executive officers do not receive any direct compensation from us.

BENEFICIAL OWNERSHIP OF OUR DIRECTORS

              The following table sets forth the dollar range of our equity securities based on the closing price of our common stock on January 22, 2010 and the number of shares beneficially owned by each

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of our directors as of December 31, 2009. We are not part of a "family of investment companies," as that term is defined in the Investment Company Act.

Name of Director
  Aggregate Dollar Range
of Equity Securities
in Ares Capital(1)(2)

Independent Directors(3)

   
 

Douglas E. Coltharp

  $50,001-$100,000
 

Frank E. O'Bryan

  Over $100,000
 

Gregory W. Penske

  None
 

Eric B. Siegel

  Over $100,000

Interested Directors

   
 

Michael J. Arougheti

  Over $100,000
 

Robert L. Rosen

  $50,001-$100,000
 

Bennett Rosenthal

  None

(1)
The dollar ranges are as follows: none, $1-$10,000, $10,001-$50,000, $50,001-$100,000 or over $100,000. The dollar range of our equity securities beneficially owned is calculated based on the closing sales price of our common stock as reported on The NASDAQ Global Select Market as of January 22, 2010.

(2)
Beneficial ownership determined in accordance with Rule 16a-1(a)(2) under the Exchange Act.

(3)
As of January 22, 2010, to the best of our knowledge, except as listed above, none of the independent directors, nor any of their immediate family members, had any interest in us, our investment adviser or any person or entity directly or indirectly controlling, controlled by or under common control with us or our investment adviser.

COMPENSATION TABLE

              The following table shows information regarding the compensation received by our directors, none of whom is our employee, for the fiscal year ended December 31, 2009. No compensation is paid by us to directors who are or are being treated as "interested persons." No information has been provided with respect to our executive officers who are not directors, since our executive officers do not receive any direct compensation from us.

Name
  Fees Earned or
Paid in Cash(1)
  Total  

Independent Directors

             
 

Douglas E. Coltharp

  $ 133,000   $ 133,000  
 

Frank E. O'Bryan

  $ 117,500   $ 117,500  
 

Gregory W. Penske(2)

  $ 62,500   $ 62,500  
 

Eric B. Siegel

  $ 130,000   $ 130,000  

Interested Directors

             
 

Michael J. Arougheti(3)

    None     None  
 

Robert L. Rosen(4)

    None     None  
 

Bennett Rosenthal

    None     None  

(1)
For a discussion of the independent directors' compensation, see below.

(2)
Mr. Penske became a director in February 2009.

(3)
Mr. Arougheti became a director in February 2009.

(4)
While Mr. Rosen did not receive any compensation from us for the fiscal year ended December 31, 2009, he did receive $117,500 from Ares Management for such period in connection with his service as our director.

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              The independent directors receive an annual fee of $75,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting and will receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of $5,000 and each chairman of any other committee receives an annual fee of $2,000 for his additional services in these capacities. In addition, we purchase directors' and officers' liability insurance on behalf of our directors and officers. Independent directors have the option to receive their directors' fees paid in shares of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment.

PORTFOLIO MANAGERS

              The following individuals function as portfolio managers primarily responsible for the day-to-day management of our portfolio. The portfolio managers are comprised of (a) the underwriting committee, whose primary responsibility is to recommend investments for approval to the Investment Committee of Ares Capital Management and (b) members of the Investment Committee of Ares Capital Management who are not otherwise on the underwriting committee.

Name
  Position   Length of
Service with
Ares (years)
  Principal Occupation(s) During Past 5 Years

Michael J. Arougheti

  President and Director of the Company     5   Mr. Arougheti has served as President of the Company since May 2004 and a director of the Company since February 2009. He is also a Founding Member of Ares. Mr. Arougheti is also a Partner in the Private Debt Group of Ares and is a Partner of Ares Capital Management. In addition, Mr. Arougheti serves as a member of the Investment Committee of Ares Capital Management and of the Investment Committee for the Ares European Private Debt Group. From October 2001 until joining the Company in May 2004, Mr. Arougheti served as a Managing Partner of the Principal Finance Group of RBC Capital Partners and a member of its Mezzanine Investment Committee.

Eric B. Beckman

 

Partner in Private Debt Group

   
11
 

Mr. Beckman joined Ares Management in 1998 and serves as a Partner in the Private Debt Group of Ares Management and serves as a member of the Investment Committee of Ares Capital Management. Before joining the Private Debt Group, Mr. Beckman served as a Senior Partner of the Private Equity Group focusing on mezzanine and special situation investments.

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Name
  Position   Length of
Service with
Ares (years)
  Principal Occupation(s) During Past 5 Years

R. Kipp deVeer

 

Partner in Private Debt Group

    5  

Mr. deVeer joined Ares Management in May 2004 and serves as a Partner in the Private Debt Group of Ares Management and serves as a member of the Investment Committee of Ares Capital Management. From 2001 until joining Ares Management, Mr. deVeer was a Partner at RBC Capital Partners, a division of Royal Bank of Canada, in the Principal Finance Group, which led the firm's middle market financing and principal investment business.

Mitchell Goldstein

 

Partner in Private Debt Group

   
4
 

Mr. Goldstein joined Ares Management in May 2005 and serves as a Partner in the Private Debt Group of Ares Management and serves as a member of the Investment Committee of Ares Capital Management. Prior to joining Ares Management, Mr. Goldstein worked at Credit Suisse First Boston, where he was a Managing Director in the Financial Sponsors Group. Mr. Goldstein joined CSFB in 2000 at the completion of the merger with Donaldson Lufkin and Jenrette.

John Kissick

 

Senior Partner in Private Equity Group

   
12
 

Mr. Kissick is a Founding Member of Ares and serves as a Senior Partner in the Private Equity Group of Ares Management. Mr. Kissick is a Senior Advisor to the Capital Markets Group of Ares Management and serves on the Investment Committee of Ares Capital Management and all Ares funds.

Antony Ressler

 

Senior Partner in Private Equity Group

   
12
 

Mr. Ressler is a Founding Member of Ares and serves as a Senior Partner in the Private Equity Group. Mr. Ressler is a Senior Advisor to the Capital Markets Group and serves on the Investment Committee of Ares Capital Management and all Ares Private Equity funds.

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Name
  Position   Length of
Service with
Ares (years)
  Principal Occupation(s) During Past 5 Years

Bennett Rosenthal

 

Chairman of the board of directors of the Company; Senior Partner in Private Equity Group

    12  

Mr. Rosenthal has served as Chairman of the Company's board of directors since 2004. He has been with Ares since 1998, is a Founding Member of Ares and serves as a Senior Partner in the Private Equity Group. Mr. Rosenthal also serves on the Investment Committee of Ares Capital Management.

David Sachs

 

Senior Partner in Capital Markets Group

   
12
 

Mr. Sachs is a Founding Member of Ares and serves as a Senior Partner in the Ares Capital Markets Group. Mr. Sachs serves on the Investment Committee of Ares Capital Management and all Ares funds.

Michael L. Smith

 

Partner in Private Debt Group

   
5
 

Mr. Smith joined Ares Management in May 2004 and serves as a Partner in the Private Debt Group of Ares Management and on the Investment Committee of Ares Capital Management. From 2001 until joining Ares Management, Mr. Smith was a Partner at RBC Capital Partners, a division of Royal Bank of Canada, in the Principal Finance Group, which led the firm's middle market financing and principal investment business.

              None of the individuals listed above is primarily responsible for the day-to-day management of the portfolio of any other account, except that Messrs. Kissick, Ressler, Rosenthal and Sachs are each Senior Partners of Ares with significant responsibilities for other Ares managed funds, which as of December 31, 2009 had approximately $33 billion (including the Company) of committed capital under management used to calculate Ares' advisory fees related to such funds. See "Risk Factors—Risks Relating to Our Business—There are significant potential conflicts of interest that could impact our investment returns."

              Each of Messrs. Arougheti, Beckman, deVeer, Goldstein and Smith is equally responsible for deal origination, execution and portfolio management. Mr. Arougheti, as our President, spends a greater amount of his time on corporate and administrative activities in his role as an officer.

              As of September 30, 2009, each of Messrs. Beckman, deVeer, Goldstein and Smith is a full-time employee of Ares Capital Management and receives a fixed salary for the services he provides to us. Each will also receive an annual amount that is equal to a fixed percentage of any incentive fee received by Ares Capital Management from us for a fiscal year. None of the portfolio managers receives any direct compensation from us.

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              The following table sets forth the dollar range of our equity securities based on the closing price of our common stock on January 22, 2010 and the number of shares beneficially owned by each of the portfolio managers described above as of December 31, 2009.

Name
  Aggregate Dollar Range of Equity Securities
in Ares Capital(1)

Michael J. Arougheti

  Over $1,000,000(2)

Eric B. Beckman

  Over $1,000,000

R. Kipp deVeer

  $100,001 - $500,000

Mitchell Goldstein

  $100,001 - $500,000

John Kissick

  None(2)

Antony Ressler

  over $1,000,000(2)

Bennett Rosenthal

  None(2)

David Sachs

  $100,001 - $500,000(2)

Michael L. Smith

  Over $1,000,000

(1)
Dollar ranges are as follows: none, $1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001-$500,000, $500,001-$1,000,000 or over $1,000,000.

(2)
Ares Investments, whose managing member is Ares Partners Management Company LLC, owned 2,859,882 shares of our common stock as of December 31, 2009. Each of the members of Ares Partners Management Company LLC (which include Messrs. Arougheti, Kissick, Ressler, Rosenthal and Sachs or vehicles controlled by them) disclaims beneficial ownership of all shares of Ares Capital common stock owned by Ares Investments, except to the extent of any indirect pecuniary interest therein. The shares of our common stock held by Ares Investments have been pledged in the ordinary course to secure indebtedness under a credit facility under which Ares Investments is a co-borrower with Ares Management, an indirect subsidiary of Ares Partners Management Company LLC.

INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT

Management Services

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

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

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              The sole member of Ares Capital Management is Ares Management, an independent international investment management firm. Ares funds, including funds managed by Ares Management, had, as of December 31, 2009, approximately $33 billion of total committed capital.

Management Fee

              Pursuant to the investment advisory and management agreement with Ares Capital Management and subject to the overall supervision of our board of directors, Ares Capital Management provides investment advisory services to us. For providing these services, Ares Capital Management receives a fee from us, consisting of two components—a base management fee and an incentive fee. Ares Capital Management has committed to defer up to $15 million in base management and incentive fees for each of the first two years following the Allied Acquisition if certain earnings targets are not met. We cannot assure you that the Allied Acquisition will be consummated. See "Pending Allied Acquisition" for a description of the terms of the Allied Acquisition, "Risk Factors—Risks Relating to Our Business—We may fail to consummate the Allied Acquisition" for a description of the risks associated with a failure to consummate the Allied Acquisition and "Risk Factors—Risks Relating to a Consummation of the Allied Acquisition" for a description of the risks that the combined company may face if the Allied Acquisition is consummated.

              The base management fee is calculated at an annual rate of 1.5% based on the average value of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) at the end of the two most recently completed calendar quarters. The base management fee is payable quarterly in arrears.

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

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

              Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter, is compared to a fixed "hurdle rate" of 2% per quarter. If market interest rates rise, we may be able to invest our funds in debt instruments that provide for a higher return, which would increase our pre-incentive fee net investment income and make it easier for our investment adviser to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income. Our pre-incentive fee net investment income used to calculate this part of the incentive fee is also included in the amount of our total assets

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(other than cash and cash equivalents but including assets purchased with borrowed funds) used to calculate the 1.5% base management fee.

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

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

              The following is a graphical representation of the calculation of the income-related portion of the incentive fee:

Quarterly Incentive Fee Based on Net Investment Income

Pre-incentive fee net investment income
(expressed as a percentage of the value of net assets)

GRAPHIC

Percentage of pre-incentive fee net investment income
allocated to income-related portion of incentive fee

              These calculations will be appropriately pro rated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.

              The second part of the incentive fee (the "Capital Gains Fee"), is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and management agreement, as of the termination date) and is calculated at the end of each applicable year by subtracting (a) the sum of our cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (b) our cumulative aggregate realized capital gains, in each case calculated from October 8, 2004. If such amount is positive at the end of such year, then the Capital Gains Fee for such year is equal to 20% of such amount, less the aggregate amount of Capital Gains Fees paid in all prior years. If such amount is negative, then there is no Capital Gains Fee for such year.

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

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

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

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

Examples of Quarterly Incentive Fee Calculation

Example 1—Income Related Portion of Incentive Fee(1):

Assumptions

    •    Hurdle rate(2) = 2.00%    
    •    Management fee(3) = 0.375%    
    •    Other expenses (legal, accounting, custodian, transfer agent, etc.)(4) = 0.20%    

(1)
The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets. In addition, the example assumes that during the most recent four full calendar quarter period ending on or prior to the date the payment set forth in the example is to be made, the sum of (a) our aggregate distributions to our stockholders and (b) our change in net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) is at least 8% of our net assets at the beginning of such period (as adjusted for any share issuances or repurchases).

(2)
Represents a quarter of the 8.0% annualized hurdle rate.

(3)
Represents a quarter of the 1.5% annualized management fee.

(4)
Excludes offering expenses.

Alternative 1

Additional Assumptions

    •    Investment income (including interest, dividends, fees, etc.) = 1.25%    
    •    Pre-incentive fee net investment income
            (investment income - (management fee + other expenses)) = 0.675%
   

              Pre-incentive fee net investment income does not exceed the hurdle rate, therefore there is no incentive fee.

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Alternative 2

Additional Assumptions

    •    Investment income (including interest, dividends, fees, etc.) = 2.70%    
    •    Pre-incentive fee net investment income
            (investment income - (management fee + other expenses)) = 2.125%
   
    Pre-incentive fee net investment income exceeds hurdle rate, therefore there is an incentive fee.    
    Incentive Fee   =   100% × "Catch-Up" + the greater of 0% AND (20% × (pre-incentive fee net investment income - 2.50%)    
        =   (100% × (2.125% - 2.00%)) + 0%    
        =   100% × 0.125%    
        =   0.125%    

Alternative 3

Additional Assumptions

    •    Investment income (including interest, dividends, fees, etc.) = 3.50%    
    •    Pre-incentive fee net investment income
            (investment income - (management fee + other expenses)) = 2.925%
   
    Pre-incentive fee net investment income exceeds hurdle rate, therefore there is an incentive fee.    
    Incentive Fee   =   100% × "Catch-Up" + the greater of 0% AND (20% × (pre-incentive fee net investment income - 2.50%)    
        =   (100% × (2.50% - 2.00%)) + (20% × (2.925% - 2.50%))    
        =   0.50% + (20% × 0.425%)    
        =   0.50% + 0.085%    
        =   0.585%    

Example 2—Capital Gains Portion of Incentive Fee:

Alternative 1:

Assumptions

The capital gains portion of the incentive fee, if any, would be:

Alternative 2

Assumptions

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The capital gains portion of the incentive fee, if any, would be:

              For the nine months ended September 30, 2009, we incurred $22.5 million in base management fees and $23.8 million in incentive management fees related to pre-incentive fee net investment income. For the nine months ended September 30, 2009, we accrued no incentive management fees related to net realized capital gains. As of September 30, 2009, $56.5 million was unpaid and included in "management and incentive fees payable" in the accompanying consolidated balance sheet. Payment of $49 million in incentive management fees for the fifteen months ended September 30, 2009 has been deferred pursuant to the investment advisory and management agreement.

              For the year ended December 31, 2008, we incurred $30.5 million in base management fees, $31.7 million in incentive management fees related to pre-incentive fee net investment income and no incentive management fees related to realized capital gains.

              For the year ended December 31, 2007, we incurred $23.5 million in base management fees, $23.5 million in incentive management fees related to pre-incentive fee net investment income and no incentive management fees related to realized capital gains.

              For the year ended December 31, 2006, we incurred $13.6 million in base management fees, $16.1 million in incentive management fees related to pre-incentive fee net investment income and $3.4 million in incentive management fees related to realized capital gains.

Payment of our Expenses

              The services of all investment professionals and staff of the investment adviser, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services, are provided and paid for by Ares Capital Management (not including services provided to any of our portfolio companies like IHAM, pursuant to separate contractual agreements). We bear all other costs and expenses of our operations and transactions, including those relating to: rent; organization; calculation of our net asset value (including the cost and expenses of any independent valuation firm); expenses incurred by Ares Capital Management payable to third parties, including agents, consultants or other advisers, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies; interest payable on indebtedness, if any, incurred to finance our investments; offerings of our common stock and other securities; investment advisory and management fees; administration fees; fees payable to third parties, including agents, consultants or other advisers, relating to, or associated with, evaluating and making investments; transfer agent and custodial fees; registration fees; listing fees; taxes; independent directors' fees and expenses; costs of preparing and filing reports or other documents with the SEC; the costs of any reports, proxy statements or other notices to stockholders, including printing costs; to the extent we are covered by any joint insurance policies, our allocable portion of the insurance premiums for such policies; direct costs and expenses of administration, including auditor and legal costs; and all other expenses incurred

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by us or Ares Operations in connection with administering our business, such as our allocable portion of overhead under the administration agreement, including our allocable portion of the salary and cost of our officers (including our chief compliance officer, chief financial officer, secretary and treasurer) and their respective staffs (including travel).

Duration and Termination

              Unless terminated earlier, the investment advisory and management agreement will continue in effect until June 1, 2010 and will renew for successive annual periods thereafter if approved annually by our board of directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not "interested persons." The investment advisory and management agreement will automatically terminate in the event of its assignment. The investment advisory and management agreement may be terminated by either party without penalty upon 60 days' written notice to the other. A discussion regarding the basis for our board of directors' approval of the continuation of the investment advisory and management agreement for 2008 is available in our annual report on Form 10-K for the fiscal year ended December 31, 2008.

              Conflicts of interest may arise if our investment adviser seeks to change the terms of our investment advisory and management agreement, including, for example, the terms for compensation. Any material change to the investment advisory and management agreement must be submitted to stockholders for approval under the Investment Company Act and we may from time to time decide it is appropriate to seek stockholder approval to change the terms of the agreement. See "Risk Factors—Risks Relating to Our Business—We are dependent upon Ares Capital Management's key personnel for our future success and upon their access to Ares' investment professionals."

Indemnification

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

Organization of the Investment Adviser

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

ADMINISTRATION AGREEMENT

              We are also party to a separate administration agreement with our administrator, Ares Operations, an affiliate of our investment adviser. Our board of directors approved the continuation of our administration agreement on May 4, 2009, which extended the term of the agreement until June 1, 2010. Pursuant to the administration agreement, Ares Operations furnishes us with office equipment and clerical, bookkeeping and record keeping services. Under the administration agreement, Ares Operations also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, Ares

158



Operations assists us in determining and publishing our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Payments under the administration agreement are equal to an amount based upon our allocable portion of Ares Operations' overhead in performing its obligations under the administration agreement, including our allocable portion of the cost of our officers (including our chief compliance officer, chief financial officer, secretary and treasurer) and their respective staffs. The administration agreement may be terminated by either party without penalty upon 60 days' written notice to the other party.

              For the nine months ended September 30, 2009, we incurred $2.9 million in administrative fees.

              For the year ended December 31, 2008, we incurred $2.7 million in administrative fees. For the year ended December 31, 2007, we incurred $1.0 million in administrative fees. For the year ended December 31, 2006, we incurred $0.9 million in administrative fees.

Indemnification

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

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

              We are party to an investment advisory and management agreement with Ares Capital Management, whose sole member is Ares Management, an entity in which certain members of our senior management and our chairman of the board have indirect ownership and financial interests. Certain members of our senior management also serve as principals of other investment managers affiliated with Ares Management that may in the future manage investment funds with investment objectives similar to ours. In addition, certain of our executive officers and directors and the members of the investment committee of our investment adviser, Ares Capital Management, serve or may serve as officers, directors or principals of entities that operate in the same or related line of business as we do or of investment funds managed by our affiliates. Accordingly, we may not be given the opportunity to participate in certain investments made by investment funds managed by advisers affiliated with Ares Management, including Ares Capital Management. However, our investment adviser and other members of Ares intend to allocate investment opportunities in a fair and equitable manner that meets our investment objective and strategies so that we are not disadvantaged in relation to any other client. See "Risk Factors—Risks Relating to Our Business—There are significant potential conflicts of interest that could impact our investment returns."

              Our investment adviser, Ares Capital Management, has financial interests in the Allied Acquisition that are different from, and/or in addition to, the interests of our stockholders. For example, Ares Capital Management's management fee is based on a percentage of our total assets. Because total assets under management will increase as a result of the Allied Acquisition, the dollar amount of Ares Capital Management's management fee will increase as a result of the Allied Acquisition. In addition, the incentive fee payable by us to Ares Capital Management may be positively impacted as a result of the Allied Acquisition. See "Unaudited Pro Forma Condensed Consolidated Financial Statements."

              Ares Capital Management has committed to defer up to $15 million in base management and incentive fees for each of the first two years following the Allied Acquisition if certain earnings targets are not met.

              Pursuant to the terms of the administration agreement, Ares Operations currently provides us with the administrative services necessary to conduct our day-to-day operations. Ares Management is the sole member of and controls Ares Operations.

              Our portfolio company, IHAM, is party to a services agreement with Ares Capital Management. Pursuant to the terms of the services agreement, Ares Capital Management provides IHAM with the facilities, investment advisory services and administrative services necessary for the operations of IHAM. IHAM reimburses Ares Capital Management for the costs and expenses incurred by Ares Capital Management in performing its obligations under the services agreement.

              We rent office space directly from a third party pursuant to a lease that expires on February 27, 2011. In addition, we have entered into a sublease agreement with Ares Management whereby Ares Management subleases approximately 25% of certain office space for a fixed rent equal to 25% of the basic annual rent payable by us under this lease, plus certain additional costs and expenses. For the years ended December 31, 2008, 2007 and 2006, such amounts payable to us totaled $0.3 million, $0.3 million and $0.1 million, respectively.

              We have also entered into a license agreement with Ares pursuant to which Ares has agreed to grant us a non-exclusive, royalty-free license to use the name "Ares." Under this agreement, we will have a right to use the Ares name for so long as Ares Capital Management remains our investment adviser. Other than with respect to this limited license, we will have no legal right to the "Ares" name. This license agreement will remain in effect for so long as the investment advisory and management agreement with Ares Capital Management is in effect and Ares Capital Management remains our

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investment adviser. Like the investment advisory and management agreement, the license agreement may also be terminated by either party without penalty upon 60 days' written notice to the other.

              In connection with our initial public offering, our investment adviser paid to underwriters, on our behalf, an additional sales load of approximately $2.5 million. This amount accrued interest at a variable rate that adjusted quarterly equal to the three-month LIBOR plus 2% per annum. We repaid this amount in full, plus accrued and unpaid interest, in February 2006.

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CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS

              To our knowledge, as of January 15, 2010, there were no persons that owned 25% or more of our outstanding voting securities and no person would be deemed to control us, as such term is defined in the Investment Company Act.

              The following table sets forth, as of January 15, 2010 (unless otherwise noted), the number of shares of our common stock beneficially owned by each of our current directors and executive officers, all directors and executive officers as a group and certain beneficial owners, according to information furnished to us by such persons or publicly available filings.

              Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Ownership information for those persons who beneficially own 5% or more of our shares of common stock is based upon Schedule 13D, Schedule 13G, Form 13F or other filings by such persons with the SEC and other information obtained from such persons. To our knowledge, as of January 15, 2010, there were no persons that owned 5% or more of our shares of common stock.

              The address for each of the directors and executive officers is c/o Ares Capital Corporation, 2000 Avenue of the Stars, 12th Floor, Los Angeles, California 90067.

Name of Beneficial Owner
  Amount and Nature of Beneficial Ownership   Percent of Class(1)  

Directors and Executive Officers:

             

Interested Directors

             

Michael J. Arougheti

    153,679 (2)   *  

Robert L. Rosen

    7,500     *  

Bennett Rosenthal

    None (2)      

Independent Directors

             

Douglas E. Coltharp

    4,500     *  

Frank E. O'Bryan

    12,400     *  

Gregory W. Penske

    None        

Eric B. Siegel

    21,200     *  

Executive Officers Who Are Not Directors

             

Joshua M. Bloomstein

    None        

Richard S. Davis

    72,093     *  

Merritt S. Hooper

    None        

Daniel F. Nguyen

    None        

Karen A. Tallman

    25,000     *  

Michael D. Weiner

    8,189 (2)   *  

All Directors and Executive Officers as a Group (12 persons)

    314,954 (2)   *  

*
Represents less than 1%.

(1)
Based on 109,944,674 shares of common stock outstanding as of January 15, 2010.

(2)
Ares Investments, whose managing member is Ares Partners Management Company LLC, owned 2,859,882 shares of our common stock as of January 15, 2010. Each of the members of Ares Partners Management Company LLC (which include Messrs. Rosenthal, Arougheti and Weiner or vehicles controlled by them) disclaims beneficial ownership of all shares of our common stock owned by Ares Investments, except to the extent of any indirect pecuniary interest therein. The shares of our common stock held by Ares Investments have been pledged in the ordinary course to secure indebtedness under a credit facility under which Ares Investments is a co-borrower with Ares Management, an indirect subsidiary of Ares Partners Management Company LLC.

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DETERMINATION OF NET ASSET VALUE

              The net asset value per share of our outstanding shares of common stock is determined quarterly by dividing the value of total assets minus liabilities by the total number of shares outstanding.

              Investments for which market quotations are readily available are typically valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available (i.e., substantially all of our investments) are valued at fair value as determined in good faith by our board of directors, based on the input of our management and audit committee and independent valuation firms that have been engaged at the direction of the board to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing 12-month period. In addition, effective January 1, 2008, the Company adopted ASC 820-10 (previously SFAS No. 157, Fair Value Measurements), which expands the application of fair value accounting for investments (see Note 8 to the consolidated financial statements for the period ended September 30, 2009). ASC 820-10 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date.

              The valuation process is conducted at the end of each fiscal quarter, with approximately 50% (based on value) of our valuations of portfolio companies without readily available market quotations subject to review by an independent valuation firm each quarter.

              As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company's debt and equity), the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company's securities to publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation.

              Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors, based on the input of our management and audit committee and independent valuation firms under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which we have previously recorded it.

              In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than would be realized based on the valuations currently assigned. For example, during 2008 and into 2009, the state of the economy in the U.S. and abroad continued to deteriorate. See "Risk Factors—Risks Relating to Our Investments—Price declines and illiquidity in the corporate debt

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markets have adversely affected, and may continue to adversely affect, the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation."

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

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DIVIDEND REINVESTMENT PLAN

              We have adopted a dividend reinvestment plan that provides for reinvestment of any distributions we declare in cash on behalf of our stockholders, unless a stockholder elects to receive cash as provided below. 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.

              No action is required on the part of a registered stockholder to have their cash dividend reinvested in shares of our common stock. A registered stockholder may elect to receive an entire cash dividend in cash by notifying Computershare Trust Company, N.A., the plan administrator and an affiliate of our transfer agent and registrar, in writing so that such notice is received by the plan administrator no later than the record date fixed by the board of directors for dividends to stockholders. The plan administrator will set up an account for shares acquired through the dividend reinvestment plan for each stockholder who has not elected to receive dividends in cash and hold such shares in non-certificated form. Upon request by a stockholder participating in the dividend reinvestment plan, received in writing no later than 10 days prior to the record date, the plan administrator will, instead of crediting fractional shares to the participant's account, issue a check for any fractional share.

              Those stockholders whose shares are held by a broker or other financial intermediary may receive dividends in cash by notifying their broker or other financial intermediary of their election.

              While we generally use primarily newly issued shares to implement the dividend reinvestment plan (especially if our shares are trading at a premium to net asset value), we may purchase shares in the open market in connection with our obligations under the dividend reinvestment plan. In particular, if our shares are trading at a significant enough discount to net asset value and we are otherwise permitted under applicable law to purchase such shares, we intend to purchase shares in the open market in connection with our obligations under our dividend reinvestment plan. The number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the dividend payable to such stockholder by the market price per share of our common stock at the close of regular trading on The NASDAQ Global Select Market on the valuation date fixed by the board of directors for such dividend. Market price per share on that date will be the closing price for such shares on The NASDAQ Global Select Market or, if no sale is reported for such day, at the average of their reported bid and asked prices. The number of shares of our common stock to be outstanding after giving effect to payment of the dividend cannot be established until the value per share at which additional shares will be issued has been determined and elections of our stockholders have been tabulated.

              There are no brokerage charges or other charges to stockholders who participate in the dividend reinvestment plan. The plan administrator's fees under the plan are paid by us. If a participant elects by notice to the plan administrator in advance of termination to have the plan administrator sell part or all of the shares held by the plan administrator in the participant's account and remit the proceeds to the participant, the plan administrator is authorized to deduct a $15 transaction fee plus a $0.12 per share fee from the proceeds.

              Stockholders whose cash dividends are reinvested in shares of our common stock are subject to the same U.S. federal, state and local tax consequences as are stockholders who elect to receive their dividends in cash. A stockholder's basis for determining gain or loss upon the sale of stock received in a dividend from us will be equal to the total dollar amount of the dividend payable to the stockholder. Any stock received on reinvestment of a cash dividend will have a new holding period for tax purposes commencing on the day following the day on which the shares are credited to the U.S. stockholder's account.

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              Participants may terminate their accounts under the dividend reinvestment plan by notifying the plan administrator via its website at www.computershare.com/investor, by filling out the transaction request form located at bottom of their statement and sending it to the plan administrator at P.O Box 43078, Providence, RI 02940-3078 or by calling the plan administrator's hotline at 1-800-426-5523.

              The dividend reinvestment plan may be terminated by us upon notice in writing mailed to each participant at least 30 days prior to any record date for the payment of any dividend by us. All correspondence concerning the dividend reinvestment plan should be directed to the plan administrator via the Internet at www.computershare.com/investor, by mail at P.O Box 43078, Providence, RI 02940-3078 or by telephone at 1-800-426-5523.

              Additional information about the dividend reinvestment plan may be obtained by contacting the plan administrator via the Internet at www.computershare.com/investor, by mail at P.O Box 43078, Providence, RI 02940-3078 or by telephone at 1-800-426-5523.

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CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

              The following discussion is a general summary of certain material U.S. federal income tax considerations applicable to us and to an investment in shares of our preferred stock or common stock. This summary does not purport to be a complete description of the income tax considerations applicable to such an investment. For example, we have not described tax consequences that we assume to be generally known by investors or certain considerations that may be relevant to certain types of holders subject to special treatment under U.S. federal income tax laws, including stockholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, pension plans and trusts, and financial institutions. This summary assumes that investors hold our preferred stock or common stock as capital assets (within the meaning of the Code). The discussion is based upon the Code, temporary and final U.S. Treasury regulations, and administrative and judicial interpretations, each as of the date of this prospectus and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. We have not sought and will not seek any ruling from the Internal Revenue Service (the "IRS") regarding the offerings pursuant to this prospectus and any accompanying prospectus supplement. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets. It also does not discuss the tax aspects of common or preferred stock sold in units with the other securities being registered.

              This summary does not discuss the consequences of an investment in our subscription rights, debt securities or warrants representing rights to purchase shares of our preferred stock, common stock or debt securities or as units in combination with such securities. The U.S. federal income tax consequences of such an investment will be discussed in a relevant prospectus supplement. In addition, we may issue preferred stock with terms resulting in U.S. federal income taxation of holders with respect to such preferred stock in a manner different from as set forth in this summary. In such instances, such differences will be discussed in a relevant prospectus supplement.

              A "U.S. stockholder" is a beneficial owner of shares of our preferred stock or common stock that is for U.S. federal income tax purposes:

              A "non-U.S. stockholder" is a beneficial owner of shares of our preferred stock or common stock that is not a U.S. stockholder, nor a partnership for U.S. federal income tax purposes.

              If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds shares of our preferred stock or common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective stockholder that is a partnership holding shares of our preferred stock or common stock or a partner of such a partnership should consult his, her or its tax advisers with respect to the purchase, ownership and disposition of shares of our preferred stock or common stock.

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              Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her or its particular situation. We encourage investors to consult their own tax advisers regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of U.S. federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.

ELECTION TO BE TAXED AS A RIC

              As a BDC, we have elected to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To qualify as a RIC, we must, among other things, meet certain income source and asset diversification requirements (as described below). In addition, we must distribute to our stockholders, for each taxable year, generally an amount equal to at least 90% of our "investment company taxable income," as defined by the Code (the "Annual Distribution Requirement"). See "Risk Factors—Risks Relating to Our Business—We may be subject to certain corporate-level taxes regardless of whether we continue to qualify as a RIC."

TAXATION AS A RIC

              If we:

then we will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gain (generally, net long-term capital gain in excess of net short-term capital loss) we distribute (or are deemed to distribute) to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gain not distributed (or deemed distributed) to our stockholders.

              We will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98% of our capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (collectively, the "Excise Tax Avoidance Requirement"). We have in the past, and can be expected to pay in the future, such excise tax on a portion of our income.

              To qualify as a RIC for U.S. federal income tax purposes, we generally must, among other things:

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              We may be required to recognize taxable income in circumstances in which we do not receive cash, such as income from hedging or foreign currency transactions. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with payment-in-kind interest or, in certain cases, increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash amount.

              Furthermore, a portfolio company in which we invest may face financial difficulty that requires us to work-out, modify or otherwise restructure our investment in the portfolio company. Any such restructuring may result in unusable capital losses and future non-cash income. Any such restructuring may also result in our recognition of a substantial amount of non-qualifying income for purposes of the 90% Income Test, such as cancellation of indebtedness income in connection with the work-out of a leveraged investment or the receipt of other non-qualifying income.

              In addition, certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (a) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (b) convert lower taxed long-term capital gain into higher taxed short-term capital gain or ordinary income, (c) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (d) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur and (e) adversely alter the characterization of certain complex financial transactions. We will monitor our transactions and may make certain tax elections in order to mitigate the effect of these provisions.

              Gain or loss recognized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant.

              Our investment in non-U.S. securities may be subject to non-U.S. income, withholding and other taxes. In that case, our yield on those securities would be decreased. Stockholders will generally not be entitled to claim a credit or deduction with respect to non-U.S. taxes paid by us.

              If we purchase shares in a "passive foreign investment company" (a "PFIC"), we may be subject to U.S. federal income tax on a portion of any "excess distribution" or gain from the disposition of such shares even if such income is distributed as a taxable dividend by us to our stockholders. Additional charges in the nature of interest may be imposed on us in respect of deferred taxes arising from such distributions or gains. If we invest in a PFIC and elect to treat the PFIC as a "qualified electing fund" under the Code (a "QEF"), in lieu of the foregoing requirements, we will be required to include in income each year a portion of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed to us. Alternatively, we can elect to mark-to-market at the end of each taxable year our shares in a PFIC; in this case, we will recognize as ordinary income any increase in the value of such shares, and as ordinary loss any decrease in such value to the extent it does not exceed prior increases included in income. Under either election, we may be required to recognize in a year income in excess of our distributions from PFICs and our proceeds from dispositions of PFIC stock

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during that year, and such income will nevertheless be subject to the Annual Distribution Requirement and will be taken into account for purposes of the 4% excise tax.

              Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time we accrue income, expenses or other liabilities denominated in a foreign currency and the time we actually collect such income or pay such expenses or liabilities are generally treated as ordinary income or loss. Similarly, gains or losses on foreign currency forward contracts and the disposition of debt denominated in a foreign currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss.

              If we borrow money, we may be prevented by loan covenants from declaring and paying dividends in certain circumstances. Limits on our payment of dividends may prevent us from meeting the Annual Distribution Requirement, and may, therefore, jeopardize our qualification for taxation as a RIC, or subject us to the 4% excise tax.

              Even if we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements, under the Investment Company Act, we are not permitted to make distributions to our stockholders while our debt obligations and senior securities are outstanding unless certain "asset coverage" tests are met. This may also jeopardize our qualification for taxation as a RIC or subject us to the 4% excise tax.

              Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets to meet the Annual Distribution Requirement, the Diversification Tests, or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

              Some of the income and fees that we recognize, such as management fees or income recognized in a work-out or restructuring of a portfolio investment, may not satisfy the 90% Income Test. In order to ensure that such income and fees do not disqualify us as a RIC for a failure to satisfy the 90% Income Test, we may be required to recognize such income and fees through one or more entities treated as U.S. corporations for U.S. federal income tax purposes. While we would expect that recognizing such income through such corporations will assist us in satisfying the 90% Income Test, no assurance can be given that this structure will be respected for U.S. federal income tax purposes, which could result in our disqualification as a RIC. Even if the structure is respected, such corporations will be required to pay U.S. corporate income tax on their earnings, which ultimately will reduce the yield on such income and fees.

              If we fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify as a RIC in any taxable year, we will be subject to tax in that year on all of our taxable income, regardless of whether we make any distributions to our stockholders. In that case, all of our income will be subject to corporate-level U.S. federal income tax, reducing the amount available to be distributed to our stockholders. In contrast, assuming we qualify as a RIC, our corporate-level U.S. federal income tax should be substantially reduced or eliminated. See "Election to be Taxed as a RIC" above and "Risk Factors—Risks Relating to Our Business—We may be subject to certain corporate-level taxes regardless of whether we continue to qualify as a RIC."

              As a RIC, we are permitted to carry forward a net capital loss from any year to offset our capital gain, if any, realized during the eight years following the year of the loss. A capital loss carryforward is treated as a short-term capital loss in the year to which it is carried. If future capital gain is offset by carried-forward capital losses, such future capital gain is not subject to fund-level U.S. federal income tax, regardless of whether they are distributed to stockholders. Because of transactions we have undertaken and may undertake in the future, our ability to use capital loss carryforwards (and

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unrealized capital losses once realized) against future capital gains is significantly limited under Sections 382 and 384 of the Code. Accordingly, we do not expect to be able to use a material amount of such losses against such gains. We cannot carry back or carry forward any net operating losses.

              The remainder of this discussion assumes that we qualify as a RIC and have satisfied the Annual Distribution Requirement.

TAXATION OF U.S. STOCKHOLDERS

              Whether an investment in the shares of our preferred stock or common stock is appropriate for a U.S. stockholder will depend upon that person's particular circumstances. An investment in the shares of our preferred stock or common stock by a U.S. stockholder may have adverse tax consequences. The following summary generally describes certain U.S. federal income tax consequences of an investment in shares of our preferred stock and common stock by taxable U.S. stockholders and not by U.S. stockholders that are generally exempt from U.S. federal income taxation. U.S. stockholders should consult their own tax advisors before investing in shares of our preferred stock or common stock.

              Distributions by us generally are taxable to U.S. stockholders as ordinary income or long-term capital gain. Distributions of our investment company taxable income (which is, generally, our ordinary income excluding net capital gain) will be taxable as ordinary income to U.S. stockholders to the extent of our current and accumulated earnings and profits, whether paid in cash or reinvested in additional shares of our common stock. Distributions of our net capital gain (which is generally our net long-term capital gain in excess of net short-term capital loss) properly designated by us as "capital gain dividends" will be taxable to a U.S. stockholder as long-term capital gain, at a maximum rate of 15% (for taxable years beginning before January 1, 2011) in the case of individuals, trusts or estates. This is true regardless of the U.S. stockholder's holding period for his, her or its preferred stock or common stock and regardless of whether the dividend is paid in cash or reinvested in additional common stock. Distributions in excess of our earnings and profits first will reduce a U.S. stockholder's adjusted tax basis in such stockholder's preferred stock or common stock and, after the adjusted basis is reduced to zero, will constitute capital gain to such U.S. stockholder. We have made distributions in excess of our earnings and profits and expect to continue to do so in the future.

              Our ordinary income dividends, but not capital gain dividends, paid to corporate U.S. stockholders may, if certain conditions are met, qualify for the 70% dividends received deduction to the extent that we have received dividends from certain corporations during the taxable year. We expect only a small portion of our dividends to qualify for this deduction.

              For taxable years beginning before January 1, 2011, to the extent distributions paid by us to U.S. stockholders that are individuals, trusts or estates are attributable to dividends from certain U.S. corporations and qualified foreign corporations and, appropriately designated, such distributions generally will be treated as "qualified dividend income." Accordingly, such distributions would be eligible for a maximum tax rate of 15% on net capital gain, provided that certain holding period requirements are met. In this regard, it is anticipated that only a small portion of distributions paid by us will be eligible for qualification as qualified dividend income.

              Although we currently intend to distribute any of our net capital gain at least annually, we may in the future decide to retain some or all of our net capital gain, but designate the retained amount as a "deemed distribution." In that case, among other consequences, we will pay tax on the retained amount, each U.S. stockholder will be required to include his, her or its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit equal to his, her or its allocable share of the tax paid thereon by us. The amount of the deemed distribution net of such tax will be added to the U.S. stockholder's tax basis for his, her or its preferred stock or common stock.

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              Since we expect to pay tax on any retained net capital gain at our regular corporate tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on net capital gain, the amount of tax that individual stockholders will be treated as having paid and for which they will receive a credit would exceed the tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against the U.S. stockholder's other U.S. federal income tax obligations or may be refunded to the extent it exceeds a stockholder's liability for U.S. federal income tax. A U.S. stockholder that is not subject to U.S. federal income tax or otherwise is not required to file a U.S. federal income tax return would be required to file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order to utilize the deemed distribution approach, we must provide written notice to our stockholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a "deemed distribution."

              We will be subject to the alternative minimum tax, also referred to as "AMT," but any items that are treated differently for AMT purposes must be apportioned between us and our stockholders and this may affect U.S. stockholders' AMT liabilities. Although regulations explaining the precise method of apportionment have not yet been issued, such items will generally be apportioned in the same proportion that dividends paid to each stockholder bear to our taxable income (determined without regard to the dividends paid deduction), unless a different method for a particular item is warranted under the circumstances.

              For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) the amount of dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S. stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it had been received by our U.S. stockholders on December 31 of the year in which the dividend was declared.

              We have the ability to declare a large portion of a dividend in shares of our stock. As long as a portion of such dividend is paid in cash (which portion can be as low as 10% for our taxable years ending on or before December 31, 2011) and certain requirements are met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes. As a result, our stockholders will be taxed on 100% of the dividend in the same manner as a cash dividend, even though most of the dividend was paid in shares of our stock. In general, any dividend on shares of our preferred stock will be taxable as a dividend, regardless of whether any portion is paid in stock.

              If an investor purchases shares of our preferred stock or common stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution and the investor will be subject to tax on the distribution even though it represents a return of his, her or its investment. We have built-up or have the potential to build up large amounts of unrealized gain which, when realized and distributed, could have the effect of a taxable return of capital to stockholders.

              A U.S. stockholder generally will recognize taxable gain or loss if the U.S. stockholder sells or otherwise disposes of his, her or its shares of our preferred stock or common stock. The amount of gain or loss will be measured by the difference between such stockholder's adjusted tax basis in the stock sold and the amount of the proceeds received in exchange. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the stockholder has held his, her or its shares for more than one year. Otherwise, it would be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our preferred stock or common stock held for six months or less will be treated as long-term capital loss to the extent of the

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amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our preferred stock or common stock may be disallowed if substantially identical stock or securities are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition.

              For taxable years beginning before January 1, 2011, in general, U.S. stockholders that are individuals, trusts or estates are subject to a maximum U.S. federal income tax rate of 15% on their net capital gain (generally, the excess of net long-term capital gain over net short-term capital loss for a taxable year, including a long-term capital gain derived from an investment in our shares). Such rate is lower than the maximum rate on ordinary income currently payable by individuals. Corporate U.S. stockholders currently are subject to U.S. federal income tax on net capital gain at the maximum 35% rate that also applies to ordinary income. Non-corporate U.S. stockholders with net capital losses for a year (i.e., capital loss in excess of capital gain) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital losses of a non-corporate U.S. stockholder in excess of $3,000 generally may be carried forward and used in subsequent years as provided in the Code. Corporate stockholders generally may not deduct any net capital losses for a year, but may carry back such losses for three years or carry forward such losses for five years.

              We will send to each of our U.S. stockholders, as promptly as possible after the end of each calendar year, a notice detailing, on a per share and per distribution basis, the amounts includible in such U.S. stockholder's taxable income for such year as ordinary income and as long-term capital gain. In addition, the U.S. federal tax status of each year's distributions generally will be reported to the IRS (including the amount of dividends, if any, eligible for the 15% maximum rate). Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. stockholder's particular situation.

              We may be required to withhold U.S. federal income tax ("backup withholding"), currently at a rate of 28%, from all taxable distributions to any non-corporate U.S. stockholder (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding or (2) with respect to whom the IRS notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual's taxpayer identification number is his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the U.S. stockholder's U.S. federal income tax liability and may entitle such stockholder to a refund, provided that proper information is timely provided to the IRS.

              Under U.S. Treasury regulations, if a stockholder recognizes a loss with respect to shares of $2 million or more for a non-corporate stockholder or $10 million or more for a corporate stockholder in any single taxable year (or a greater loss over a combination of years), the stockholder must file with the IRS a disclosure statement on Form 8886. Direct stockholders of portfolio securities in many cases are excepted from this reporting requirement, but under current guidance, stockholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to stockholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Significant monetary penalties apply to a failure to comply with this reporting requirement. States may also have a similar reporting requirement. Stockholders should consult their own tax advisors to determine the applicability of these regulations in light of their individual circumstances.

TAXATION OF NON-U.S. STOCKHOLDERS

              Whether an investment in shares of our preferred stock or common stock is appropriate for a non-U.S. stockholder will depend upon that person's particular circumstances. An investment in shares

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of our preferred stock or common stock by a non-U.S. stockholder may have adverse tax consequences and, accordingly, may not be appropriate for a non-U.S. stockholder. Non-U.S. stockholders should consult their own tax advisors before investing in our preferred stock or common stock.

              Distributions of our investment company taxable income to non-U.S. stockholders will be subject to withholding of U.S. federal income tax at a 30% rate (or such lower rate as is provided by an applicable income tax treaty) to the extent of our current and accumulated earnings and profits unless an exception applies. If the distributions are effectively connected with a U.S. trade or business of the non-U.S. stockholder, or, if an income tax treaty applies, are attributable to a permanent establishment in the United States of the non-U.S. stockholder, distributions will be subject to U.S. federal income tax at the rates applicable to U.S. persons. In that case, we will not be required to withhold U.S. federal income tax if the non-U.S. stockholder complies with applicable certification and disclosure requirements. Special certification requirements apply to a non-U.S. stockholder that is a foreign trust and such entities are urged to consult their own tax advisors.

              In addition, with respect to certain distributions made to non-U.S. stockholders in our taxable years beginning before January 1, 2010, no withholding will be required and the distributions generally will not be subject to U.S. federal income tax if (a) the distributions are properly designated in a notice timely delivered to our stockholders as "interest related dividends" or "short-term capital gain dividends," (b) the distributions are derived from sources specified in the Code for such dividends and (c) certain other requirements are satisfied. If a non-U.S. stockholder holds our shares of preferred stock or common stock through a brokerage account, no assurance can be given that the exemptions to taxations described in this paragraph will apply. Furthermore, no assurance can be given that we would designate any of our distributions as interest-related dividends or short-term capital gain dividends even if we were permitted to do so.

              Actual or deemed distributions of our net capital gain (which is generally our net long-term capital gain in excess of net short-term capital loss) to a non-U.S. stockholder, and gains recognized by a non-U.S. stockholder upon the sale of our preferred stock or common stock, will not be subject to withholding of U.S. federal income tax and generally will not be subject to U.S. federal income tax (a) unless the distributions or gains, as the case may be, are effectively connected with a U.S. trade or business of the non-U.S. stockholder and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the non-U.S. stockholder in the United States or (b) the non-U.S. stockholder is an individual, has been present in the United States for 183 days or more during the taxable year, and certain other conditions are satisfied.

              If we distribute our net capital gain in the form of deemed rather than actual distributions (which we may do in the future), a non-U.S. stockholder will be entitled to a U.S. federal income tax credit or tax refund equal to the non-U.S. stockholder's allocable share of the tax we pay on the capital gain deemed to have been distributed. In order to obtain the refund, the non-U.S. stockholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income tax return. For a corporate non-U.S. stockholder, distributions (both actual and deemed), and gains recognized upon the sale of our preferred stock or common stock that are effectively connected with a U.S. trade or business may, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate (or at a lower rate if provided for by an applicable income tax treaty).

              We have the ability to declare a large portion of a dividend in shares of our stock. As long as a portion of such dividend is paid in cash (which portion can be as low as 10% for our taxable years ending on or before December 31, 2011) and certain requirements are met, the entire distribution will be treated as a dividend for U.S. federal income tax purposes. As a result, our non-U.S. stockholders will be taxed on 100% of the dividend in the same manner as a cash dividend, even though most of the

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dividend was paid in shares of our stock. In general, any dividend on shares of our preferred stock will be taxable as a dividend, regardless of whether any portion is paid in stock.

              A non-U.S. stockholder who is a non-resident alien individual, and who is otherwise subject to withholding of U.S. federal income tax, may be subject to information reporting and backup withholding of U.S. federal income tax on dividends unless the non-U.S. stockholder provides us or the dividend paying agent with an IRS Form W-8BEN (or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a non-U.S. stockholder or otherwise establishes an exemption from backup withholding.

FAILURE TO QUALIFY AS A RIC

              If we were unable to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders nor would we be required to make distributions for tax purposes. Distributions would generally be taxable to our stockholders as ordinary dividend income eligible for the 15% maximum rate (for taxable years beginning before January 1, 2011) to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate U.S. stockholders would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder's tax basis, and any remaining distributions would be treated as a capital gain. If we were to fail to meet the RIC requirements for more than two consecutive years and then to seek to requalify as a RIC, we would be required to recognize gain to the extent of any unrealized appreciation in our assets unless we made a special election to pay corporate-level tax on any such unrealized appreciation recognized during the succeeding 10-year period.

POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSIDERATIONS

              Prospective investors should recognize that the present U.S. federal income tax treatment of an investment in us may be modified by legislative, judicial or administrative action at any time, and that any such action may affect investments and commitments previously made. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. Revisions in U.S. federal tax laws and interpretations thereof could adversely affect the tax consequences of an investment in us.

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DESCRIPTION OF SECURITIES

              This prospectus contains a summary of the common stock, preferred stock, subscription rights, debt securities and warrants. These summaries are not meant to be a complete description of each security. However, this prospectus and the accompanying prospectus supplement will contain the material terms and conditions for each security.

              Any of the securities described herein and in a prospectus supplement may be issued separately or as part of a unit consisting of two or more securities, which may or may not be separable from one another.


DESCRIPTION OF OUR CAPITAL STOCK

              The following description is based on relevant portions of the Maryland General Corporation Law and on our charter and bylaws. This summary is not necessarily complete, and we refer you to the Maryland General Corporation Law and our charter and bylaws for a more detailed description of the provisions summarized below.

STOCK

              Our authorized stock consists of 300,000,000 shares of stock, par value $0.001 per share, all of which are currently designated as common stock. Our common stock trades on The NASDAQ Global Select Market under the symbol "ARCC." On January 22, 2010, the last reported sales price of our common stock on The NASDAQ Global Select Market was $12.77 per share. There are no outstanding options or warrants to purchase our stock. No stock has been authorized for issuance under any equity compensation plans. Under Maryland law, our stockholders generally are not personally liable for our indebtedness or obligations.

              Under our charter, our board of directors is authorized to classify and reclassify any unissued shares of stock into other classes or series of stock and authorize the issuance of shares of stock without obtaining stockholder approval. As permitted by the Maryland General Corporation Law, our charter provides that the board of directors, without any action by our stockholders, may amend the charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue.

Common Stock

              All shares of our common stock have equal rights as to earnings, assets, dividends and voting and, when they are issued, will be duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our board of directors and declared by us out of funds legally available therefor. Shares of our common stock have no preemptive, exchange, conversion or redemption rights and are freely transferable, except where their transfer is restricted by federal and state securities laws or by contract.

              In the event of a liquidation, dissolution or winding up of the Company, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay off all indebtedness and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time.

              Each share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting power. There is no cumulative voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock can elect all of our directors, and holders of less than a majority of such shares will be unable to elect any director.

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              The following are our outstanding classes of capital stock as of January 15, 2010:

(1)
Title of Class
  (2)
Amount Authorized
  (3)
Amount Held by
Registrant
or for its
Account
  (4)
Amount Outstanding
Exclusive of Amount
Shown Under
Column (3)
 

Common Stock

    300,000,000         109,944,674  

Preferred Stock

              Our charter authorizes our board of directors to classify and reclassify any unissued shares of stock into other classes or series of stock, including preferred stock. Prior to issuance of shares of each class or series, the board of directors is required by Maryland law and by our charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, our board of directors could authorize the issuance of shares of our preferred stock with terms and conditions that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest.

              You should note, however, that any issuance of preferred stock must comply with the requirements of the Investment Company Act. The Investment Company Act requires, among other things, that (a) immediately after issuance and before any dividend or other distribution is made with respect to our common stock and before any purchase of common stock is made, such preferred stock together with all other indebtedness and senior securities must not exceed an amount equal to 50% of our total assets after deducting the amount of such dividend, distribution or purchase price, as the case may be and (b) the holders of shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock are in arrears by two years or more. Certain matters under the Investment Company Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, holders of preferred stock would vote separately from the holders of common stock on a proposal to cease operations as a BDC. We believe that the availability for issuance of preferred stock may provide us with increased flexibility in structuring future financings and acquisitions.

LIMITATION ON LIABILITY OF DIRECTORS AND OFFICERS; INDEMNIFICATION AND ADVANCE OF EXPENSES

              Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our charter contains such a provision, which eliminates directors' and officers' liability to the maximum extent permitted by Maryland law, subject to the requirements of the Investment Company Act.

              Our charter authorizes us to obligate ourselves, and our bylaws obligate us, to the maximum extent permitted by Maryland law and subject to the requirements of the Investment Company Act, to indemnify any present or former director or officer or any individual who, while a director or officer and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee, from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her service in that capacity and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding. The charter and bylaws also permit us to

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indemnify and advance expenses to any person who served a predecessor of us in any of the capacities described above and any of our employees or agents or any employees or agents of our predecessor. In accordance with the Investment Company Act, we will not indemnify any person for any liability to that such person would be subject by reason of such person's willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.

              In addition to the indemnification provided for in our bylaws, we have entered into indemnification agreements with each of our current directors and certain of our officers and with members of our investment adviser's investment committee and we intend to enter into indemnification agreements with each of our future directors, members of our investment committee and certain of our officers. The indemnification agreements attempt to provide these directors, officers and other persons the maximum indemnification permitted under Maryland law and the Investment Company Act. The agreements provide, among other things, for the advancement of expenses and indemnification for liabilities which such person may incur by reason of his or her status as a present or former director or officer or member of our investment adviser's investment committee in any action or proceeding arising out of the performance of such person's services as a present or former director or officer or member of our investment adviser's investment committee.

              Maryland law requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or are threatened to be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that a personal benefit was improperly received, unless in either case a court orders indemnification, and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer upon the corporation's receipt of (x) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (y) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

PROVISIONS OF THE MARYLAND GENERAL CORPORATION LAW AND OUR CHARTER AND BYLAWS

              The Maryland General Corporation Law and our charter and bylaws contain provisions that could make it more difficult for a potential acquiror to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.

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Classified Board of Directors

              Our board of directors is divided into three classes of directors serving staggered three-year terms, with the term of office of only one of the three classes expiring each year. A classified board may render a change in control of us or removal of our incumbent management more difficult. We believe, however, that the longer time required to elect a majority of a classified board of directors helps to ensure the continuity and stability of our management and policies.

Election of Directors

              Our charter and bylaws provide that the affirmative vote of the holders of a majority of the outstanding shares of stock entitled to vote in the election of directors will be required to elect a director. Pursuant to the charter, our board of directors may amend the bylaws to alter the vote required to elect directors.

Number of Directors; Vacancies; Removal

              Our charter provides that the number of directors will be set only by the board of directors in accordance with our bylaws. Our bylaws provide that a majority of our entire board of directors may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than four nor more than eight. Our charter sets forth our election, subject to certain requirements, to be subject to the provision of Subtitle 8 of Title 3 of the Maryland General Corporation Law regarding the filling of vacancies on the board of directors. Accordingly, except as may be provided by the board of directors in setting the terms of any class or series of preferred stock, any and all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the Investment Company Act.

              Our charter provides that a director may be removed only for cause, as defined in our charter, and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors.

Action by Stockholders

              Under the Maryland General Corporation Law and our charter, stockholder action can be taken only at an annual or special meeting of stockholders or by unanimous written or electronically transmitted consent instead of a meeting. These provisions, combined with the requirements of our bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.

Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals

              Our bylaws provide that with respect to an annual meeting of stockholders, nominations of individuals for election to the board of directors and the proposal of business to be considered by stockholders may be made only (a) pursuant to our notice of the meeting, (b) by or at the direction of the board of directors or (c) by a stockholder who is a stockholder of record both at the time of giving the advance notice required by the bylaws and at the time of the meeting, who is entitled to vote at the meeting in the election of each individual so nominated or on any such other business and who has complied with the advance notice procedures of the bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of individuals for election to the board of directors at a special meeting may be made only (a) by or at the direction of the board of directors or (b) provided that the special meeting

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has been called in accordance with the bylaws for the purpose of electing directors, by a stockholder who is a stockholder of record both at the time of giving the advance notice required by the bylaws and at the time of the meeting, who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the advance notice provisions of the bylaws.

              The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our board of directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our board of directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.

Calling of Special Meetings of Stockholders

              Our bylaws provide that special meetings of stockholders may be called by our board of directors and certain of our officers. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders will be called by the secretary of the corporation to act on any matter that may properly be considered at a meeting of stockholders upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.

Approval of Extraordinary Corporate Action; Amendment of Charter and Bylaws

              Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. See "Risk Factors—Risks Relating to Offerings Pursuant to this Prospectus—Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock." However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter generally provides for approval of charter amendments and extraordinary transactions by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. Our charter also provides that certain charter amendments and any proposal for our conversion, whether by merger or otherwise, from a closed-end company to an open-end company or any proposal for our liquidation or dissolution requires the approval of the stockholders entitled to cast at least 80 percent of the votes entitled to be cast on such matter. However, if such amendment or proposal is approved by at least two-thirds of our continuing directors (in addition to approval by our board of directors), such amendment or proposal may be approved by a majority of the votes entitled to be cast on such a matter. The "continuing directors" are defined in our charter as our current directors as well as those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of the continuing directors then on the board of directors.

              Our charter and bylaws provide that the board of directors will have the exclusive power to adopt, alter or repeal any provision of our bylaws and to make new bylaws.

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No Appraisal Rights

              Except with respect to appraisal rights arising in connection with the Maryland Control Share Acquisition Act discussed below, as permitted by the Maryland General Corporation Law, our charter provides that stockholders will not be entitled to exercise appraisal rights unless a majority of our board of directors determines that such rights will apply, with respect to all or any classes or series of stock, to one or more transactions occurring after the date of such determination in connection with which stockholders would otherwise be entitled to exercise appraisal rights.

Control Share Acquisitions

              The Control Share Acquisition Act provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, by officers or by employees who are directors of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:

              The requisite stockholder approval must be obtained each time an acquiror crosses one of the thresholds of voting power set forth above. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.

              A person who has made or proposes to make a control share acquisition may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.

              If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may repurchase for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to repurchase control shares is subject to certain conditions and limitations, including, as provided in our bylaws, compliance with the Investment Company Act, which will prohibit any such repurchase other than in limited circumstances. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.

              The Control Share Acquisition Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation.

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              Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions by any person of our shares of stock. Such provision could also be amended or eliminated at any time in the future. However, we will amend our bylaws to be subject to the Control Share Acquisition Act only if the board of directors determines that it would be in our best interests based on our determination that our being subject to the Control Share Acquisition Act does not conflict with the Investment Company Act.

Business Combinations

              Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:

              A person is not an interested stockholder under this statute if the board of directors approved in advance the transaction by which such person otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

              After the five-year prohibition, any business combination between the corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

              These super-majority vote requirements do not apply if the corporation's common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

              The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Our board of directors has adopted a resolution that any business combination between us and any other person is exempted from the provisions of the Business Combination Act, provided that the business combination is first approved by the board of directors, including a majority of the directors who are not "interested persons" of the Company as defined in Section 2(a)(19) of the Investment Company Act. This resolution, however, may be altered or repealed in whole or in part at any time. If this resolution is repealed, or the board of directors does not otherwise approve a business combination, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

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Conflict with the Investment Company Act

              Our bylaws provide that, if and to the extent that any provision of the Maryland General Corporation Law, including the Control Share Acquisition Act (if we amend our bylaws to be subject to such act) and the Business Combination Act, or any provision of our charter or bylaws conflicts with any provision of the Investment Company Act, the applicable provision of the Investment Company Act will control.

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SALES OF COMMON STOCK BELOW NET ASSET VALUE

              At our 2009 Annual Stockholders Meeting, our stockholders approved our ability to sell or otherwise issue shares of our common stock, not exceeding 25% of our outstanding common stock at the time of such issuance, at a price below the then current net asset value per share during a period beginning on May 4, 2009 and expiring on the earlier of the anniversary of the date of the 2009 Annual Stockholders Meeting and the date of our 2010 Annual Stockholders Meeting, which is expected to be held in May 2010.

              In order to sell shares of common stock pursuant to this authorization, no further authorization from our stockholders has to be solicited, but a majority of our directors who have no financial interest in the sale and a majority of our independent directors must (a) find that the sale is in our best interests and in the best interests of our stockholders and (b) in consultation with any underwriter or underwriters of the offering, make a good faith determination as of a time either immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares of common stock, or immediately prior to the issuance of such common stock, that the price at which such shares of common stock are to be sold is not less than a price which closely approximates the market value of those shares of common stock, less any distributing commission or discount.

              On August 19, 2009, we closed an underwritten public offering of 12,439,908 shares of our common stock (including 1,439,908 shares pursuant to the exercise by the underwriters of their overallotment option) at a price per share of $9.25 to the public, which was a price below the then current net asset value per share.

              Any offering of common stock below its net asset value per share will be designed to raise capital for investment in accordance with our investment objective.

              In making a determination that an offering of common stock below its net asset value per share is in our and our stockholders' best interests, our board of directors will consider a variety of factors including:

              Our board of directors will also consider the fact that sales of shares of common stock at a discount will benefit our investment adviser as the investment adviser will earn additional investment

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management fees on the proceeds of such offerings, as it would from the offering of any other of our securities or from the offering of common stock at premium to net asset value per share.

              We will not sell shares of our common stock under this prospectus or an accompanying prospectus supplement pursuant to the Stockholder Approval without first filing a new post-effective amendment to the registration statement if the cumulative dilution to our net asset value per share from offerings under the registration statement, as amended by this post-effective amendment, exceeds 15%. This would be measured separately for each offering pursuant to the registration statement, as amended by this post-effective amendment, by calculating the percentage dilution or accretion to aggregate net asset value from that offering and then summing the percentage from each offering. For example, if our most recently determined net asset value per share at the time of the first offering is $15.00 and we have 30 million shares of common stock outstanding, the sale of 6 million shares of common stock at net proceeds to us of $7.50 per share (a 50% discount) would produce dilution of 8.33%. If we subsequently determined that our net asset value per share increased to $15.75 on the then 36 million shares of common stock outstanding and then made an additional offering, we could, for example, sell approximately an additional 7.2 million shares of common stock at net proceeds to us of $9.45 per share, which would produce dilution of 6.67%, before we would reach the aggregate 15% limit.

              Sales by us of our common stock at a discount from net asset value per share pose potential risks for our existing stockholders whether or not they participate in the offering, as well as for new investors who participate in the offering. Any sale of common stock at a price below net asset value per share would result in an immediate dilution to existing common stockholders who do not participate in such sale on at least a pro-rata basis. See "Risk Factors—Risks Relating to Offerings Pursuant to this Prospectus—The net asset value per share of our common stock may be diluted if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock or securities to subscribe for or convertible into shares of our common stock."

              The following three headings and accompanying tables explain and provide hypothetical examples on the impact of an offering of our common stock at a price less than net asset value per share on three different types of investors:

Impact On Existing Stockholders Who Do Not Participate in the Offering

              Our current stockholders who do not participate in an offering below net asset value per share or who do not buy additional shares in the secondary market at the same or lower price as we obtain in the offering (after expenses and commissions) face the greatest potential risks. These stockholders will experience an immediate dilution in the net asset value of the shares of common stock they hold and their net asset value per share. These stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we will experience in our assets, potential earning power and voting interests due to such offering. These stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential increases and decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and level of discounts increases. Further, if current stockholders do not purchase any shares to maintain their percentage interest, regardless of whether such offering is above or below the then current net asset value, their voting power will be diluted.

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              The following chart illustrates the level of net asset value dilution that would be experienced by a nonparticipating stockholder in three different hypothetical offerings of different sizes and levels of discount from net asset value per share. It is not possible to predict the level of market price decline that may occur.

              The examples assume that the issuer has 30 million shares outstanding, $600 million in total assets and $150 million in total liabilities. The current net asset value and net asset value per share are thus $450 million and $15.00. The chart illustrates the dilutive effect on Stockholder A of (a) an offering of 1.5 million shares of common stock (5% of the outstanding shares) at $14.25 per share after offering expenses and commissions (a 5% discount from net asset value), (b) an offering of 3 million shares of common stock (10% of the outstanding shares) at $13.50 per share after offering expenses and commissions (a 10% discount from net asset value) and (c) an offering of 6 million shares of common stock (20% of the outstanding shares) at $12.00 per share after offering expenses and commissions (a 20% discount from net asset value). The prospectus supplement pursuant to which any discounted offering is made will include a chart based on the actual number of shares of common stock in such offering and the actual discount to the most recently determined net asset value. It is not possible to predict the level of market price decline that may occur.

 
   
  Example 1   Example 2   Example 3  
 
   
  5% Offering at
5% Discount
  10% Offering at
10% Discount
  20% Offering at
20% Discount
 
 
  Prior to Sale
Below NAV
  Following
Sale
  %
Change
  Following
Sale
  %
Change
  Following
Sale
  %
Change
 

Offering Price

                             
 

Price per Share to Public

      $15.00     $14.21     $12.63    

Net Proceeds per Share to Issuer

      $14.25     $13.50     $12.00    

Decrease to Net Asset Value

                             
 

Total Shares Outstanding

  30,000,000   31,500,000   5.00 % 33,000,000   10.00 % 36,000,000   20.00 %
 

Net Asset Value per Share

  $15.00   $14.96   (0.24 )% $14.86   (0.91 )% $14.50   (3.33 )%

Dilution to Nonparticipating Stockholder

                             
 

Shares Held by Stockholder A

  30,000   30,000   0.00 % 30,000   0.00 % 30,000   0.00 %
 

Percentage Held by Stockholder A

  0.10 % 0.10 %(1) (4.76 )% 0.09 % (9.09 )% 0.08 % (16.67 )%
 

Total Net Asset Value Held by Stockholder A

  $450,000   $448,929   (0.24 )% $445,909   (0.91 )% $435,000   (3.33 )%
 

Total Investment by Stockholder A (Assumed to Be $15.00 per Share)

  $450,000   $450,000       $450,000       $450,000      
 

Total Dilution to Stockholder A (Total Net Asset Value Less Total Investment)

      $(1,071 )     $(4,091 )     $(15,000 )    
 

Investment per Share Held by Stockholder A (Assumed to be $15.00 per Share on Shares Held Prior to Sale)

  $15.00   $15.00   0.00 % $15.00   0.00 % $15.00   0.00 %
 

Net Asset Value per Share Held by Stockholder A

      $14.96       $14.86       $14.50      
 

Dilution per Share Held by Stockholder A (Net Asset Value per Share Less Investment per Share)

      $(0.04 )     $(0.14 )     $(0.50 )    
 

Percentage Dilution to Stockholder A (Dilution per Share Divided by Investment per Share)

          (0.24 )%     (0.91 )%     (3.33 )%

(1)
To be carried out to the third decimal place.

Impact On Existing Stockholders Who Do Participate in the Offering

              Our existing stockholders who participate in an offering below net asset value per share or who buy additional shares in the secondary market at the same or lower price as we obtain in the offering (after expenses and commissions) will experience the same types of net asset value dilution as the nonparticipating stockholders, although at a lower level, to the extent they purchase less than the same percentage of the discounted offering as their interest in shares of our common stock immediately prior to the offering. The level of net asset value dilution will decrease as the number of shares such stockholders purchase increases. Existing stockholders who buy more than such percentage will

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experience net asset value dilution but will, in contrast to existing stockholders who purchase less than their proportionate share of the offering, experience accretion in net asset value per share over their investment per share and will also experience a disproportionately greater increase in their participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests due to such offering. The level of accretion will increase as the excess number of shares such stockholder purchases increases. Even a stockholder who over-participates will, however, be subject to the risk that we may make additional discounted offerings in which such stockholder does not participate, in which case such a stockholder will experience net asset value dilution as described above in such subsequent offerings. These stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential increases and decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and level of discounts increases.

              The following chart illustrates the level of dilution and accretion in the hypothetical 20% discount offering from the prior chart (Example 3) for a stockholder that acquires shares equal to (a) 50% of its proportionate share of the offering (i.e., 3,000 shares, which is 0.05% of an offering of 6 million shares) rather than its 0.10% proportionate share and (b) 150% of such percentage (i.e. 9,000 shares, which is 0.15% of an offering of 6 million shares rather than its 0.10% proportionate share). The prospectus supplement pursuant to which any discounted offering is made will include a chart for these examples based on the actual number of shares in such offering and the actual discount from the most recently determined net asset value per share. It is not possible to predict the level of market price decline that may occur.

 
   
  50% Participation   150% Participation  
 
  Prior to Sale
Below NAV
  Following
Sale
  %
Change
  Following
Sale
  %
Change
 

Offering Price

                     
 

Price per Share to Public

      $12.63       $12.63      
 

Net Proceeds per Share to Issuer

      $12.00       $12.00      

Decrease/Increase to Net Asset Value

                     
 

Total Shares Outstanding

  30,000,000   36,000,000   20 % 36,000,000   20 %
 

Net Asset Value per Share

  $15.00   $14.50   (3.33 )% $14.50   (3.33 )%

Dilution/Accretion to Participating Stockholder Shares Held by Stockholder A

  30,000   33,000   10 % 39,000   30 %
 

Percentage Held by Stockholder A

  0.10 % 0.09 % (8.33 )% 0.11 % 8.33 %
 

Total Net Asset Value Held by Stockholder A

  $450,000   $478,500   6.33 % $565,500   25.67 %
 

Total Investment by Stockholder A (Assumed to be $15.00 per Share on Shares Held Prior to Sale)

      $487,895       $563,684      
 

Total Dilution/Accretion to Stockholder A (Total Net Asset Value Less Total Investment)

      $(9,395 )     $1,816      
 

Investment per Share Held by Stockholder A (Assumed to Be $15.00 on Shares Held Prior to Sale)

  $15.00   $14.78   (1.44 )% $14.45   (3.64 )%
   

Net Asset Value per Share Held by Stockholder A

      $14.50       $14.50      
 

Dilution/Accretion per Share Held by Stockholder A (Net Asset Value per Share Less Investment per Share)

      $(0.28 )     $0.05   0.40 %
 

Percentage Dilution/Accretion to Stockholder A (Dilution per Share Divided by Investment per Share)

          (1.96 )%     0.32 %

Impact On New Investors

              Investors who are not currently stockholders and who participate in an offering of shares of our common stock below net asset value, but whose investment per share is greater than the resulting net asset value per share due to selling compensation and expenses paid by the Company, will experience an immediate decrease, although small, in the net asset value of their shares and their net asset value per share compared to the price they pay for their shares. Investors who are not currently stockholders and who participate in an offering of shares of our common stock below net asset value

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per share and whose investment per share is also less than the resulting net asset value per share due to selling compensation and expenses paid by the Company being significantly less than the discount per share, will experience an immediate increase in the net asset value of their shares and their net asset value per share compared to the price they pay for their shares. These investors will experience a disproportionately greater participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests due to such offering. These investors will, however, be subject to the risk that we may make additional discounted offerings in which such new stockholder does not participate, in which case such new stockholder will experience dilution as described above in such subsequent offerings. These investors may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential increases and decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and level of discounts increases.

              The following chart illustrates the level of dilution or accretion for new investors that would be experienced by a new investor in the same hypothetical 5%, 10% and 20% discounted offerings as described in the first chart above. The illustration is for a new investor who purchases the same percentage (0.10%) of the shares in the offering as Stockholder A in the prior examples held immediately prior to the offering. The prospectus supplement pursuant to which any discounted offering is made will include a chart for these examples based on the actual number of shares in such offering and the actual discount from the most recently determined net asset value per share. It is not possible to predict the level of market price decline that may occur.

 
   
  Example 1   Example 2   Example 3  
 
   
  5% Offering at 5% Discount   10% Offering at 10% Discount   20% Offering at 20% Discount  
 
  Prior to Sale
Below NAV
  Following
Sale
  %
Change
  Following
Sale
  %
Change
  Following
Sale
  %
Change
 

Offering Price

                             

Price per Share to Public

      $15.00       $14.21       $12.63      

Net Proceeds per Share to Issuer

      $14.25       $13.50       $12.00      

Decrease/Increase to Net Asset Value

                             
 

Total Shares Outstanding

  30,000,000   31,500,000   5 % 33,000,000   10 % 36,000,000   20 %
 

Net Asset Value per Share

  $15.00   $14.96   (0.24 )% $14.86   (0.91 )% $14.50   (3.33 )%

Dilution/Accretion to New Investor A

                             
 

Shares Held by Investor A

  0   1,500       3,000       6,000      
 

Percentage Held by Investor A

  0.00 % 0.00 %     0.01 %     0.02 %    
 

Total Net Asset Value Held by Investor A

  $0   $22,446       $44,591       $87,000      
 

Total Investment by Investor A (At Price to Public)

      $22,500       $42,632       $75,789      
 

Total Dilution/Accretion to Investor A (Total Net Asset Value Less Total Investment)

      $(54 )     $1,959       $11,211      
 

Investment per Share Held by Investor A

  $0   $15.00       $14.21       $12.63      
 

Net Asset Value per Share Held by Investor A

      $14.96       $14.86       $14.50      
 

Dilution/Accretion per Share Held by Investor A (Net Asset Value per Share Less Investment per Share)

      $(0.04 )     $0.65       $1.87      

Percentage Dilution/Accretion to Investor A (Dilution per Share Divided by Investment per Share)

          (0.24 )%     4.60 %     14.79 %

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ISSUANCE OF WARRANTS OR SECURITIES TO SUBSCRIBE
FOR OR CONVERTIBLE INTO SHARES OF OUR COMMON STOCK

              At our 2009 Annual Stockholders Meeting, our stockholders also approved our ability to sell or otherwise issue warrants or securities to subscribe for or convertible into shares of our common stock, not exceeding 25% of our then outstanding common stock, at an exercise or conversion price that, at the date of issuance, will not be less than the greater of the market value per share of our common stock and the net asset value per share of our common stock. Any exercise of warrants or securities to subscribe for or convertible into shares of our common stock at an exercise or conversion price that is below net asset value at the time of such exercise or conversion would result in an immediate dilution to existing common stockholders. This dilution would include reduction in net asset value as a result of the proportionately greater decrease in the stockholders' interest in our earnings and assets and their voting interest than the increase in our assets resulting from such offering.

              As a result of obtaining this authorization, in order to sell or otherwise issue such securities, (a) the exercise, conversion or subscription rights in such securities must expire by their terms within 10 years, (b) with respect to any warrants, options or rights to subscribe or convert to our common stock that are issued along with other securities, such warrants, options or rights must not be separately transferable, (c) the exercise or conversion price of such securities must not be less than the greater of the market value per share of our common stock and the net asset value per share of our common stock at the date of issuance of such securities, (d) the issuance of such securities must be approved by a majority of the board of directors who have no financial interest in the transaction and a majority of the non-interested directors on the basis that such issuance is in the best interests of the Company and its stockholders and (e) the number of shares of our common stock that would result from the exercise or conversion of such securities and all other securities convertible, exercisable or exchangeable into shares of our common stock outstanding at the time of issuance of such securities must not exceed 25% of our outstanding common stock at such time.

              We could also sell shares of common stock below net asset value per share in certain other circumstances, including through subscription rights issued in rights offerings. See "Description of Our Subscription Rights" and "Risk Factors—Risks Relating to Offerings Pursuant to this Prospectus—Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than our net asset value per share, then you will experience an immediate dilution of the aggregate net asset value of your shares."

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DESCRIPTION OF OUR PREFERRED STOCK

              In addition to shares of common stock, our charter authorizes the issuance of preferred stock. If we offer preferred stock under this prospectus, we will issue an appropriate prospectus supplement. We may issue preferred stock from time to time in one or more classes or series, without stockholder approval. Prior to issuance of shares of each class or series, our board of directors is required by Maryland law and by our charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Any such an issuance must adhere to the requirements of the Investment Company Act, Maryland law and any other limitations imposed by law.

              The Investment Company Act currently requires, among other things, that (a) immediately after issuance and before any distribution is made with respect to common stock, the liquidation preference of the preferred stock, together with all other senior securities, must not exceed an amount equal to 50% of our total assets (taking into account such distribution), (b) the holders of shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on the preferred stock are in arrears by two years or more and (c) such class of stock have complete priority over any other class as to distribution of assets and payment of dividends, which dividends shall be cumulative.

              For any series of preferred stock that we may issue, our board of directors will determine and the articles supplementary and the prospectus supplement relating to such series will describe:

              All shares of preferred stock that we may issue will be identical and of equal rank except as to the particular terms thereof that may be fixed by our board of directors, and all shares of each series of preferred stock will be identical and of equal rank except as to the dates from which dividends, if any, thereon will be cumulative.

190



DESCRIPTION OF OUR SUBSCRIPTION RIGHTS

GENERAL

              We may issue subscription rights to our stockholders to purchase common stock. Subscription rights may be issued independently or together with any other offered security and may or may not be transferable by the person purchasing or receiving the subscription rights. In connection with a subscription rights offering to our stockholders, we would distribute certificates evidencing the subscription rights and a prospectus supplement to our stockholders on the record date that we set for receiving subscription rights in such subscription rights offering.

              The applicable prospectus supplement would describe the following terms of subscription rights in respect of which this prospectus is being delivered:

EXERCISE OF SUBSCRIPTION RIGHTS

              Each subscription right would entitle the holder of the subscription right to purchase for cash such amount of shares of common stock at such exercise price as shall in each case be set forth in, or be determinable as set forth in, the prospectus supplement relating to the subscription rights offered thereby. Subscription rights may be exercised at any time up to the close of business on the expiration date for such subscription rights set forth in the prospectus supplement. After the close of business on the expiration date, all unexercised subscription rights would become void.

              Subscription rights may be exercised as set forth in the prospectus supplement relating to the subscription rights offered thereby. Upon receipt of payment and the subscription rights certificate properly completed and duly executed at the corporate trust office of the subscription rights agent or any other office indicated in the prospectus supplement we will forward, as soon as practicable, the shares of common stock purchasable upon such exercise. To the extent permissible under applicable law, we may determine to offer any unsubscribed offered securities directly to persons other than stockholders, to or through agents, underwriters or dealers or through a combination of such methods, as set forth in the applicable prospectus supplement.

191



DESCRIPTION OF OUR WARRANTS

              The following is a general description of the terms of the warrants we may issue from time to time. Particular terms of any warrants we offer will be described in the prospectus supplement relating to such warrants.

              We may issue warrants to purchase shares of our common stock, preferred stock or debt securities. Such warrants may be issued independently or together with shares of common stock, preferred stock or debt securities and may be attached or separate from such securities. We will issue each series of warrants under a separate warrant agreement to be entered into between us and a warrant agent. The warrant agent will act solely as our agent and will not assume any obligation or relationship of agency for or with holders or beneficial owners of warrants.

              A prospectus supplement will describe the particular terms of any series of warrants we may issue, including the following:

              We and the warrant agent may amend or supplement the warrant agreement for a series of warrants without the consent of the holders of the warrants issued thereunder to effect changes that

192



are not inconsistent with the provisions of the warrants and that do not materially and adversely affect the interests of the holders of the warrants.

              Prior to exercising their warrants, holders of warrants will not have any of the rights of holders of the securities purchasable upon such exercise, including, in the case of warrants to purchase debt securities, the right to receive principal, premium, if any, or interest payments, on the debt securities purchasable upon exercise or to enforce covenants in the applicable indenture or, in the case of warrants to purchase common stock or preferred stock, the right to receive dividends, if any, or payments upon our liquidation, dissolution or winding up or to exercise any voting rights.

              Under the Investment Company Act, we may generally only offer warrants provided that (a) the warrants expire by their terms within ten years, (b) the exercise or conversion price is not less than the current market value at the date of issuance, (c) our stockholders authorize the proposal to issue such warrants, and our board of directors approves such issuance on the basis that the issuance is in the best interests of Ares Capital and its stockholders and (d) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying them has been publicly distributed. The Investment Company Act also provides that the amount of our voting securities that would result from the exercise of all outstanding warrants, as well as options and rights, at the time of issuance may not exceed 25% of our outstanding voting securities.

193



DESCRIPTION OF OUR DEBT SECURITIES

              We may issue debt securities in one or more series. The specific terms of each series of debt securities will be described in the particular prospectus supplement relating to that series. The prospectus supplement may or may not modify the general terms found in this prospectus and will be filed with the SEC. For a complete description of the terms of a particular series of debt securities, you should read both this prospectus and the prospectus supplement relating to that particular series.

              As required by federal law for all bonds and notes of companies that are publicly offered, the debt securities are governed by a document called an "indenture." An indenture is a contract between us and U.S. Bank National Association, a financial institution acting as trustee on your behalf, and is subject to and governed by the Trust Indenture Act of 1939, as amended. The trustee has two main roles. First, the trustee can enforce your rights against us if we default. There are some limitations on the extent to which the trustee acts on your behalf, described in the second paragraph under "Events of Default—Remedies if an Event of Default Occurs." Second, the trustee performs certain administrative duties for us.

              Because this section is a summary, it does not describe every aspect of the debt securities and the indenture. We urge you to read the indenture because it, and not this description, defines your rights as a holder of debt securities. For example, in this section, we use capitalized words to signify terms that are specifically defined in the indenture. Some of the definitions are repeated in this prospectus, but for the rest you will need to read the indenture. We have filed the form of the indenture with the SEC. See "Available Information" for information on how to obtain a copy of the indenture.

              The prospectus supplement, which will accompany this prospectus, will describe the particular series of debt securities being offered, including, among other things:

194


              The debt securities may be secured or unsecured obligations. Unless the prospectus supplement states otherwise, principal (and premium, if any) and interest, if any, will be paid by us in immediately available funds.

              We are permitted, under specified conditions, to issue multiple classes of indebtedness if our asset coverage, as defined in the Investment Company Act, is at least equal to 200% immediately after each such issuance. In addition, while any indebtedness and senior securities remain outstanding, we must make provisions to prohibit the distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. Specifically, we may be precluded from declaring dividends or repurchasing shares of our common stock unless our asset coverage is at least 200%. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see "Risk Factors—Risks Relating to Our Business—Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital."

GENERAL

              The indenture provides that any debt securities proposed to be sold under this prospectus and the attached prospectus supplement ("offered debt securities") and any debt securities issuable upon the exercise of warrants or upon conversion or exchange of other offered securities ("underlying debt securities"), may be issued under the indenture in one or more series.

              For purposes of this prospectus, any reference to the payment of principal of or premium or interest, if any, on debt securities will include additional amounts if required by the terms of the debt securities.

              The indenture does not limit the amount of debt securities that may be issued thereunder from time to time. Debt securities issued under the indenture, when a single trustee is acting for all debt securities issued under the indenture, are called the "indenture securities." The indenture also provides that there may be more than one trustee thereunder, each with respect to one or more different series of indenture securities. See "Resignation of Trustee" below. At a time when two or more trustees are acting under the indenture, each with respect to only certain series, the term "indenture securities" means the one or more series of debt securities with respect to which each respective trustee is acting.

195



In the event that there is more than one trustee under the indenture, the powers and trust obligations of each trustee described in this prospectus will extend only to the one or more series of indenture securities for which it is trustee. If two or more trustees are acting under the indenture, then the indenture securities for which each trustee is acting would be treated as if issued under separate indentures.

              The indenture does not contain any provisions that give you protection in the event we issue a large amount of debt or we are acquired by another entity.

              We refer you to the prospectus supplement for information with respect to any deletions from, modifications of or additions to the Events of Default or our covenants that are described below, including any addition of a covenant or other provision providing event risk or similar protection.

              We have the ability to issue indenture securities with terms different from those of indenture securities previously issued and, without the consent of the holders thereof, to reopen a previous issue of a series of indenture securities and issue additional indenture securities of that series unless the reopening was restricted when that series was created.

              We expect that we will usually issue debt securities in book entry only form represented by global securities.

CONVERSION AND EXCHANGE

              If any debt securities are convertible into or exchangeable for other securities, the prospectus supplement will explain the terms and conditions of the conversion or exchange, including the conversion price or exchange ratio (or the calculation method), the conversion or exchange period (or how the period will be determined), if conversion or exchange will be mandatory or at the option of the holder or us, provisions for adjusting the conversion price or the exchange ratio and provisions affecting conversion or exchange in the event of the redemption of the underlying debt securities. These terms may also include provisions under which the number or amount of other securities to be received by the holders of the debt securities upon conversion or exchange would be calculated according to the market price of the other securities as of a time stated in the prospectus supplement.

PAYMENT AND PAYING AGENTS

              We will pay interest to the person listed in the applicable trustee's records as the owner of the debt security at the close of business on a particular day in advance of each due date for interest, even if that person no longer owns the debt security on the interest due date. That day, usually about two weeks in advance of the interest due date, is called the "record date." Because we will pay all the interest for an interest period to the holders on the record date, holders buying and selling debt securities must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price of the debt securities to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called "accrued interest."

Payments on Global Securities

              We will make payments on a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holder's right to those payments will be governed by the rules and practices of the depositary and its participants.

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Payments on Certificated Securities

              We will make payments on a certificated debt security as follows. We will pay interest that is due on an interest payment date by check mailed on the interest payment date to the holder at his or her address shown on the trustee's records as of the close of business on the regular record date. We will make all payments of principal and premium, if any, by check at the office of the applicable trustee in New York, NY and/or at other offices that may be specified in the prospectus supplement or in a notice to holders against surrender of the debt security.

              Alternatively, if the holder asks us to do so, we will pay any amount that becomes due on the debt security by wire transfer of immediately available funds to an account at a bank in New York City, on the due date. To request payment by wire, the holder must give the applicable trustee or other paying agent appropriate transfer instructions at least 15 business days before the requested wire payment is due. In the case of any interest payment due on an interest payment date, the instructions must be given by the person who is the holder on the relevant regular record date. Any wire instructions, once properly given, will remain in effect unless and until new instructions are given in the manner described above.

Payment When Offices Are Closed

              If any payment is due on a debt security on a day that is not a business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the indenture as if they were made on the original due date, except as otherwise indicated in the attached prospectus supplement. Such payment will not result in a default under any debt security or the indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.

              Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on their debt securities.

EVENTS OF DEFAULT

              You will have rights if an Event of Default occurs in respect of the debt securities of your series and is not cured, as described later in this subsection.

              The term "Event of Default" in respect of the debt securities of your series means any of the following (unless the prospectus supplement relating to such debt securities states otherwise):

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              An Event of Default for a particular series of debt securities does not necessarily constitute an Event of Default for any other series of debt securities issued under the same or any other indenture. The trustee may withhold notice to the holders of debt securities of any default, except in the payment of principal, premium or interest, if it considers the withholding of notice to be in the best interests of the holders.

Remedies if an Event of Default Occurs

              If an Event of Default has occurred and has not been cured, the trustee or the holders of at least 25% in principal amount of the debt securities of the affected series may declare the entire principal amount of all the debt securities of that series to be due and immediately payable. This is called a declaration of acceleration of maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the debt securities of the affected series.

              The trustee is not required to take any action under the indenture at the request of any holders unless the holders offer the trustee reasonable protection from expenses and liability (called an "indemnity"). (Section 315 of the Trust Indenture Act of 1939) If reasonable indemnity is provided, the holders of a majority in principal amount of the outstanding debt securities of the relevant series may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.

              Before you are allowed to bypass your trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the debt securities, the following must occur:

              However, you are entitled at any time to bring a lawsuit for the payment of money due on your debt securities on or after the due date.

              Holders of a majority in principal amount of the debt securities of the affected series may waive any past defaults other than:

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              Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of maturity.

              Each year, we will furnish to each trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the indenture and the debt securities, or else specifying any default.

MERGER OR CONSOLIDATION

              Under the terms of the indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or substantially all of our assets to another entity. However, unless the prospectus supplement relating to certain debt securities states otherwise, we may not take any of these actions unless all the following conditions are met:

MODIFICATION OR WAIVER

              There are three types of changes we can make to the indenture and the debt securities issued thereunder.

Changes Requiring Your Approval

              First, there are changes that we cannot make to your debt securities without your specific approval. The following is a list of those types of changes:

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Changes Not Requiring Approval

              The second type of change does not require any vote by the holders of the debt securities. This type is limited to clarifications and certain other changes that would not adversely affect holders of the outstanding debt securities in any material respect. We also do not need any approval to make any change that affects only debt securities to be issued under the indenture after the change takes effect.

Changes Requiring Majority Approval

              Any other change to the indenture and the debt securities would require the following approval:

              The holders of a majority in principal amount of all of the series of debt securities issued under an indenture, voting together as one class for this purpose, may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under "—Changes Requiring Your Approval."

Further Details Concerning Voting

              When taking a vote, we will use the following rules to decide how much principal to attribute to a debt security:

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              Debt securities will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their payment or redemption. Debt securities will also not be eligible to vote if they have been fully defeased as described later under "Defeasance—Full Defeasance."

              We will generally be entitled to set any day as a record date for the purpose of determining the holders of outstanding indenture securities that are entitled to vote or take other action under the indenture. If we set a record date for a vote or other action to be taken by holders of one or more series, that vote or action may be taken only by persons who are holders of outstanding indenture securities of those series on the record date and must be taken within eleven months following the record date.

              Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the indenture or the debt securities or request a waiver.

DEFEASANCE

              The following provisions will be applicable to each series of debt securities unless we state in the applicable prospectus supplement that the provisions of covenant defeasance and full defeasance will not be applicable to that series.

Covenant Defeasance

              Under current United States federal tax law, we can make the deposit described below and be released from some of the restrictive covenants in the indenture under which the particular series was issued. This is called "covenant defeasance." In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your debt securities. If applicable, you also would be released from the subordination provisions described under "Indenture Provisions—Subordination" below. In order to achieve covenant defeasance, we must do the following:

              We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the Investment Company Act, as amended, and a legal opinion and officers' certificate stating that all conditions precedent to covenant defeasance have been complied with.

              If we accomplish covenant defeasance, you can still look to us for repayment of the debt securities if there were a shortfall in the trust deposit or the trustee is prevented from making payment. For example, if one of the remaining Events of Default occurred (such as our bankruptcy) and the debt securities became immediately due and payable, there might be a shortfall. Depending on the event causing the default, you may not be able to obtain payment of the shortfall.

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Full Defeasance

              If there is a change in U.S. federal tax law, as described below, we can legally release ourselves from all payment and other obligations on the debt securities of a particular series (called "full defeasance") if we put in place the following other arrangements for you to be repaid:

              If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the debt securities. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent. If applicable, you would also be released from the subordination provisions described later under "Indenture Provisions—Subordination."

FORM, EXCHANGE AND TRANSFER OF CERTIFICATED REGISTERED SECURITIES

              Holders may exchange their certificated securities, if any, for debt securities of smaller denominations or combined into fewer debt securities of larger denominations, as long as the total principal amount is not changed.

              Holders may exchange or transfer their certificated securities, if any, at the office of their trustee. We have appointed the trustee to act as our agent for registering debt securities in the names of holders transferring debt securities. We may appoint another entity to perform these functions or perform them ourselves.

              Holders will not be required to pay a service charge to transfer or exchange their certificated securities, if any, but they may be required to pay any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holder's proof of legal ownership.

              If we have designated additional transfer agents for your debt security, they will be named in your prospectus supplement. We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts.

              If any certificated securities of a particular series are redeemable and we redeem less than all the debt securities of that series, we may block the transfer or exchange of those debt securities during

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the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to freeze the list of holders to prepare the mailing. We may also refuse to register transfers or exchanges of any certificated securities selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any debt security that will be partially redeemed.

RESIGNATION OF TRUSTEE

              Each trustee may resign or be removed with respect to one or more series of indenture securities provided that a successor trustee is appointed to act with respect to these series. In the event that two or more persons are acting as trustee with respect to different series of indenture securities under the indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.

INDENTURE PROVISIONS—SUBORDINATION

              Upon any distribution of our assets upon our dissolution, winding up, liquidation or reorganization, the payment of the principal of (and premium, if any) and interest, if any, on any indenture securities denominated as subordinated debt securities is to be subordinated to the extent provided in the indenture in right of payment to the prior payment in full of all Senior Indebtedness (as defined below), but our obligation to you to make payment of the principal of (and premium, if any) and interest, if any, on such subordinated debt securities will not otherwise be affected. In addition, no payment on account of principal (or premium, if any), sinking fund or interest, if any, may be made on such subordinated debt securities at any time unless full payment of all amounts due in respect of the principal (and premium, if any), sinking fund and interest on Senior Indebtedness has been made or duly provided for in money or money's worth.

              In the event that, notwithstanding the foregoing, any payment by us is received by the trustee in respect of subordinated debt securities or by the holders of any of such subordinated debt securities before all Senior Indebtedness is paid in full, the payment or distribution must be paid over to the holders of the Senior Indebtedness or on their behalf for application to the payment of all the Senior Indebtedness remaining unpaid until all the Senior Indebtedness has been paid in full, after giving effect to any concurrent payment or distribution to the holders of the Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness upon this distribution by us, the holders of such subordinated debt securities will be subrogated to the rights of the holders of the Senior Indebtedness to the extent of payments made to the holders of the Senior Indebtedness out of the distributive share of such subordinated debt securities.

              By reason of this subordination, in the event of a distribution of our assets upon our insolvency, certain of our senior creditors may recover more, ratably, than holders of any subordinated debt securities. The indenture provides that these subordination provisions will not apply to money and securities held in trust under the defeasance provisions of the indenture.

              Senior Indebtedness is defined in the indenture as the principal of (and premium, if any) and unpaid interest on:

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              If this prospectus is being delivered in connection with the offering of a series of indenture securities denominated as subordinated debt securities, the accompanying prospectus supplement will set forth the approximate amount of our Senior Indebtedness outstanding as of a recent date.

THE TRUSTEE UNDER THE INDENTURE

              U.S. Bank National Association will serve as the trustee under the indenture.

CERTAIN CONSIDERATIONS RELATING TO FOREIGN CURRENCIES

              Debt securities denominated or payable in foreign currencies may entail significant risks. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved and will be more fully described in the applicable prospectus supplement.

BOOK-ENTRY DEBT SECURITIES

              DTC will act as securities depository for the debt securities. The debt securities will be issued as fully registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered certificate will be issued for the debt securities, in the aggregate principal amount of such issue, and will be deposited with DTC.

              DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC").

              DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org.

              Purchases of debt securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the debt securities on DTC's records. The ownership interest of each actual purchaser of each security ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of

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ownership interests in the debt securities are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in debt securities, except in the event that use of the book-entry system for the debt securities is discontinued.

              To facilitate subsequent transfers, all debt securities deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of debt securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the debt securities; DTC's records reflect only the identity of the Direct Participants to whose accounts such debt securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

              Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

              Redemption notices shall be sent to DTC. If less than all of the debt securities within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

              Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the debt securities unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to us as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the debt securities are credited on the record date (identified in a listing attached to the Omnibus Proxy).

              Redemption proceeds, distributions, and dividend payments on the debt securities will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from us or the trustee on the payment date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC nor its nominee, the trustee, or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the trustee, but disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

              DTC may discontinue providing its services as securities depository with respect to the debt securities at any time by giving reasonable notice to us or to the trustee. Under such circumstances, in the event that a successor securities depository is not obtained, certificates are required to be printed and delivered. We may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, certificates will be printed and delivered to DTC.

              The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for the accuracy thereof.

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REGULATION

              We have elected to be regulated as a BDC under the Investment Company Act and have elected to be treated as a RIC under Subchapter M of the Code. As with other companies regulated by the Investment Company Act, a BDC must adhere to certain substantive regulatory requirements. The Investment Company Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers or sub-advisers), principal underwriters and certain affiliates of those affiliates or underwriters. Among other things, we cannot invest in any portfolio company in which any of the funds managed by Ares currently has an investment (although we may co-invest on a concurrent basis with other funds managed by Ares, subject to compliance with existing regulatory guidance, applicable regulations and our allocation procedures). Some of these co-investments would only be permitted pursuant to an exemptive order from the SEC. We have applied for an exemptive order from the SEC that would permit us to co-invest with funds managed by Ares Capital Management. Any such order will be subject to certain terms and conditions. There is no assurance that the application for exemptive relief will be granted by the SEC. Accordingly, we cannot assure you that we will be permitted to co-invest with funds managed by Ares. See "Risk Factors—Risks Relating to Our Business—We may not replicate Ares' historical success and our ability to enter into transactions with Ares and our other affiliates is restricted." The Investment Company Act also requires that a majority of the directors be persons other than "interested persons," as that term is defined in the Investment Company Act. In addition, the Investment Company Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless that change is approved by a majority of our outstanding voting securities. Under the Investment Company Act, the vote of holders of a majority of outstanding voting securities means the vote of the holders of the lesser of: (a) 67% or more of the outstanding shares of our common stock present at a meeting or represented by proxy if holders of more than 50% of the shares of our common stock are present or represented by proxy or (b) more than 50% of the outstanding shares of our common stock.

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

QUALIFYING ASSETS

              A BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) below. Thus, under the Investment Company Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the Investment Company Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of

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the company's total assets. The principal categories of qualifying assets relevant to our proposed business are the following:

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MANAGERIAL ASSISTANCE TO PORTFOLIO COMPANIES

              In order to count portfolio securities as qualifying assets for the purpose of the 70% test discussed above under "Qualifying Assets," the BDC must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where the BDC purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance (as long as the BDC itself does not make available significant managerial assistance solely in this fashion). Making available managerial assistance means, among other things, exercising control over the management or policies of the portfolio company or any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if the offer is accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

TEMPORARY INVESTMENTS

              Pending investment in other types of "qualifying assets," as described above, our investments may consist of cash, cash items, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as "temporary investments," so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. Government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the diversification tests in order to qualify as a RIC. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our investment adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.

INDEBTEDNESS AND SENIOR SECURITIES

              We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the Investment Company Act, is at least equal to 200% immediately after each such issuance. In addition, while any indebtedness and senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. Specifically, we may be precluded from declaring dividends or repurchasing shares of our common stock unless our asset coverage is at least 200%. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see "Risk Factors—Risks Relating to Our Business—Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital."

CODE OF ETHICS

              We and Ares Capital Management have each adopted a code of ethics pursuant to Rule 17j-1 under the Investment Company Act that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code's requirements. Our code of ethics is filed as an

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exhibit to our registration statement of which this prospectus is a part. For information on how to obtain a copy of the code of ethics, see "Available Information."

PROXY VOTING POLICIES AND PROCEDURES

              SEC-registered advisers that have the authority to vote (client) proxies (which authority may be implied from a general grant of investment discretion) are required to adopt policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interests of its clients. Registered advisers also must maintain certain records on proxy voting. In most cases, we invest in securities that do not generally entitle it to voting rights in its portfolio companies. When we do have voting rights, we delegate the exercise of such rights to Ares Capital Management. Ares Capital Management's proxy voting policies and procedures are summarized below:

              In determining how to vote, officers of our investment adviser consult with each other and other investment professionals of Ares, taking into account our and our investors' interests as well as any potential conflicts of interest. Our investment adviser consults with legal counsel to identify potential conflicts of interest. Where a potential conflict of interest exists, our investment adviser may, if it so elects, resolve it by following the recommendation of a disinterested third party, by seeking the direction of the independent directors of the Company or, in extreme cases, by abstaining from voting. While our investment adviser may retain an outside service to provide voting recommendations and to assist in analyzing votes, our investment adviser will not delegate its voting authority to any third party.

              An officer of Ares Capital Management keeps a written record of how all such proxies are voted. Our investment adviser retains records of (a) proxy voting policies and procedures, (b) all proxy statements received (or it may rely on proxy statements filed on the SEC's EDGAR system in lieu thereof), (c) all votes cast, (d) investor requests for voting information and (e) any specific documents prepared or received in connection with a decision on a proxy vote. If it uses an outside service, our investment adviser may rely on such service to maintain copies of proxy statements and records, so long as such service will provide a copy of such documents promptly upon request.

              Our investment adviser's proxy voting policies are not exhaustive and are designed to be responsive to the wide range of issues that may be subject to a proxy vote. In general, our investment adviser votes our proxies in accordance with these guidelines unless: (a) it has determined otherwise due to the specific and unusual facts and circumstances with respect to a particular vote, (b) the subject matter of the vote is not covered by these guidelines, (c) a material conflict of interest is present or (d) we find it necessary to vote contrary to our general guidelines to maximize stockholder value or the best interests of Ares Capital. In reviewing proxy issues, our investment adviser generally uses the following guidelines:

              Elections of Directors:    In general, our investment adviser will vote in favor of the management-proposed slate of directors. If there is a proxy fight for seats on a portfolio company's board of directors, or our investment adviser determines that there are other compelling reasons for withholding our vote, it will determine the appropriate vote on the matter. Our investment adviser may withhold votes for directors when it (a) believes a direct conflict of interest exists between the interests of the director and the stockholders, (b) concludes that the actions of the director are unlawful, unethical or negligent or (c) believes the board is entrenched in or dealing inadequately with performance problems, and/or acting with insufficient independence between the board and management. Finally, our investment adviser may withhold votes for directors of non-U.S. issuers where there is insufficient information about the nominees disclosed in the proxy statement.

              Appointment of Auditors:    We believe that a portfolio company remains in the best position to choose its independent auditors and our investment adviser will generally support management's recommendation in this regard.

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              Changes in Capital Structure:    Changes in a portfolio company's charter or bylaws may be required by state or federal regulation. In general, our investment adviser will cast our votes in accordance with the management on such proposals. However, our investment adviser will consider carefully any proposal regarding a change in corporate structure that is not required by state or federal regulation.

              Corporate Restructurings, Mergers and Acquisitions:    We believe proxy votes dealing with corporate reorganizations are an extension of the investment decision. Accordingly, our investment adviser will analyze such proposals on a case-by-case basis and vote in accordance with its perception of our interests.

              Proposals Affecting Stockholder Rights:    We will generally vote in favor of proposals that give stockholders a greater voice in the affairs of a portfolio company and oppose any measure that seeks to limit such rights. However, when analyzing such proposals, our investment adviser will balance the financial impact of the proposal against any impairment of stockholder rights as well as of our investment in the portfolio company.

              Corporate Governance:    We recognize the importance of good corporate governance. Accordingly, our investment adviser will generally favor proposals that promote transparency and accountability within a portfolio company.

              Anti-Takeover Measures:    Our investment adviser will evaluate, on a case-by-case basis, any proposals regarding anti-takeover measures to determine the measure's likely effect on stockholder value dilution.

              Stock Splits:    Our investment adviser will generally vote with management on stock split matters.

              Limited Liability of Directors:    Our investment adviser will generally vote with management on matters that could adversely affect the limited liability of directors.

              Social and Corporate Responsibility:    Our investment adviser will review proposals related to social, political and environmental issues to determine whether they may adversely affect stockholder value. Our investment adviser may abstain from voting on such proposals where they do not have a readily determinable financial impact on stockholder value.

              Stockholders may obtain information regarding how we voted proxies with respect to our portfolio securities during the twelve-month period ended June 30, 2009 free of charge by making a written request for proxy voting information to: Ares Capital Corporation, 2000 Avenue of the Stars, 12th Floor, Los Angeles, California 90067 or by calling us collect at (310) 401-4200.

PRIVACY PRINCIPLES

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

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

210


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

              When the Company shares non-public stockholder personal information referred to above, the information is made available for limited business purposes and under controlled circumstances designed to protect our stockholders' privacy. The Company does not permit use of stockholder information for any non-business or marketing purpose, nor does the Company permit third parties to rent, sell, trade or otherwise release or disclose information to any other party.

              The Company's service providers, such as its adviser, administrator, and transfer agent, are required to maintain physical, electronic, and procedural safeguards to protect stockholder non-public personal information; to prevent unauthorized access or use; and to dispose of such information when it is no longer required.

              Personnel of affiliates may access stockholder information only for business purposes. The degree of access is based on the sensitivity of the information and on personnel need for the information to service a stockholder's account or comply with legal requirements.

              If a stockholder ceases to be a stockholder, we will adhere to the privacy policies and practices as described above. We may choose to modify our privacy policies at any time. Before we do so, we will notify stockholders and provide a description of our privacy policy.

              In the event of a corporate change in control resulting from, for example, a sale to, or merger with, another entity, or in the event of a sale of assets, we reserve the right to transfer your non-public personal information to the new party in control or the party acquiring assets.

OTHER

              We have designated a chief compliance officer and established a compliance program pursuant to the requirements of the Investment Company Act. We are periodically examined by the SEC for compliance with the Investment Company Act.

              We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to the Company or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person's office.

211


Compliance with the Sarbanes-Oxley Act of 2002 and The NASDAQ Global Select Market Corporate Governance Regulations

              The Sarbanes-Oxley Act of 2002 imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect us. The Sarbanes-Oxley Act has required us to review our policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all future regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.

              In addition, The NASDAQ Global Select Market has adopted various corporate governance requirements as part of its listing standards. We believe we are in compliance with such corporate governance listing standards. We will continue to monitor our compliance with all future listing standards and will take actions necessary to ensure that we are in compliance therewith.


CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

              Our securities are held under a custody agreement by U.S. Bank National Association. The address of the custodian is Corporate Trust Services, One Federal Street, 3rd Floor, Boston, MA 02110. Computershare Investor Services, LLC acts as our transfer agent, dividend paying agent and registrar. The principal business address of Computershare is 250 Royall Street, Canton, Massachusetts 02021, telephone number: (312) 588-4993.


BROKERAGE ALLOCATION AND OTHER PRACTICES

              Since we generally acquire and dispose of our investments in privately negotiated transactions, we infrequently use brokers in the normal course of business.

              Subject to policies established by our board of directors, the investment adviser, Ares Capital Management, is primarily responsible for the execution of the publicly traded securities portion of our portfolio transactions and the allocation of brokerage commissions. The investment adviser does not expect to execute transactions through any particular broker or dealer, but seeks to obtain the best net results for the Company, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm and the firm's risk and skill in positioning blocks of securities.

              While the investment adviser generally seeks reasonably competitive trade execution costs, we will not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, the investment adviser may select a broker based partly upon brokerage or research services provided to the investment adviser and us and any other clients. In return for such services, we may pay a higher commission than other brokers would charge if the investment adviser determines in good faith that such commission is reasonable in relation to the services provided.

              We haven't paid any brokerage commissions during the three most recent fiscal years.

212



PLAN OF DISTRIBUTION

              We may offer, from time to time, up to $1,000,000,000 of our common stock, preferred stock, debt securities, subscription rights to purchase shares of our common stock or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, separately or as units comprised of any combination of the foregoing, in one or more underwritten public offerings, at-the-market offerings, negotiated transactions, block trades, best efforts or a combination of these methods. We may sell the securities through underwriters or dealers, directly to one or more purchasers, including existing stockholders in a rights offering, through agents or through a combination of any such methods of sale. In the case of a rights offering, the applicable prospectus supplement will set forth the number of shares of our common stock issuable upon the exercise of each right and the other terms of such rights offering. Any underwriter or agent involved in the offer and sale of the securities will be named in the applicable prospectus supplement. A prospectus supplement or supplements will also describe the terms of the offering of the securities, including: the purchase price of the securities and the proceeds we will receive from the sale; any over-allotment options under which underwriters may purchase additional securities from us; any agency fees or underwriting discounts and other items constituting agents' or underwriters' compensation; the public offering price; any discounts or concessions allowed or re-allowed or paid to dealers; and any securities exchange or market on which the securities may be listed. Only underwriters named in the prospectus supplement will be underwriters of the securities offered by the prospectus supplement.

              The distribution of the securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at prevailing market prices at the time of sale, at prices related to such prevailing market prices, or at negotiated prices, provided, however, that the offering price per share of our common stock, less any underwriting commissions or discounts, must equal or exceed the net asset value per share of our common stock at the time of the offering except (a) in connection with a rights offering to our existing stockholders, (b) with the consent of the majority of our common stockholders or (c) under such circumstances as the SEC may permit. The price at which securities may be distributed may represent a discount from prevailing market prices.

              In connection with the sale of the securities, underwriters or agents may receive compensation from us or from purchasers of the securities, for whom they may act as agents, in the form of discounts, concessions or commissions. Underwriters may sell the securities to or through dealers and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of the securities may be deemed to be underwriters under the Securities Act, and any discounts and commissions they receive from us and any profit realized by them on the resale of the securities may be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or agent will be identified and any such compensation received from us will be described in the applicable prospectus supplement. The maximum aggregate commission or discount to be received by any member of FINRA or independent broker-dealer will not be greater than 8% of the gross proceeds of the sale of securities offered pursuant to this prospectus and any applicable prospectus supplement. We may also reimburse the underwriter or agent for certain fees and legal expenses incurred by it.

              Any underwriter may engage in over-allotment, stabilizing transactions, short-covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves sales in excess of the offering size, which create a short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum price. Syndicate-covering or other short-covering transactions involve purchases of the securities, either through exercise of the over-allotment option or in the open market after the distribution is completed, to cover short positions. Penalty bids permit the underwriters to reclaim a selling concession from a dealer when the securities originally sold by the dealer are

213



purchased in a stabilizing or covering transaction to cover short positions. Those activities may cause the price of the securities to be higher than it would otherwise be. If commenced, the underwriters may discontinue any of the activities at any time.

              Any underwriters that are qualified market makers on the NASDAQ Global Market may engage in passive market making transactions in our common stock on the NASDAQ Global Market in accordance with Regulation M under the Exchange Act, during the business day prior to the pricing of the offering, before the commencement of offers or sales of our common stock. Passive market makers must comply with applicable volume and price limitations and must be identified as passive market makers. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market maker's bid, however, the passive market maker's bid must then be lowered when certain purchase limits are exceeded. Passive market making may stabilize the market price of the securities at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.

              We may sell securities directly or through agents we designate from time to time. We will name any agent involved in the offering and sale of securities and we will describe any commissions we will pay the agent in the prospectus supplement. Unless the prospectus supplement states otherwise, our agent will act on a best-efforts basis for the period of its appointment.

              Unless otherwise specified in the applicable prospectus supplement, each class or series of securities will be a new issue with no trading market, other than our common stock, which is traded on The NASDAQ Global Select Market. We may elect to list any other class or series of securities on any exchanges, but we are not obligated to do so. We cannot guarantee the liquidity of the trading markets for any securities.

              Under agreements that we may enter, underwriters, dealers and agents who participate in the distribution of shares of our securities may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act, or contribution with respect to payments that the agents or underwriters may make with respect to these liabilities. Underwriters, dealers and agents may engage in transactions with, or perform services for, us in the ordinary course of business.

              If so indicated in the applicable prospectus supplement, we will authorize underwriters or other persons acting as our agents to solicit offers by certain institutions to purchase our securities from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contracts may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such institutions must be approved by us. The obligations of any purchaser under any such contract will be subject to the condition that the purchase of our securities shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such other agents will not have any responsibility in respect of the validity or performance of such contracts. Such contracts will be subject only to those conditions set forth in the prospectus supplement, and the prospectus supplement will set forth the commission payable for solicitation of such contracts.

              We may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated transactions. If the applicable prospectus supplement indicates, in connection with those derivatives, the third parties may sell securities covered by this prospectus and the applicable prospectus supplement, including in short sale transactions. If so, the third party may use securities pledged by us or borrowed from us or others to settle those sales or to close out any related open borrowings of stock, and may use securities received from us in settlement of those derivatives to close out any related open borrowings of stock. The third parties in such sale transactions will be underwriters and, if not identified in this prospectus, will be identified in the applicable prospectus supplement.

214


              In order to comply with the securities laws of certain states, if applicable, our securities offered hereby will be sold in such jurisdictions only through registered or licensed brokers or dealers.


LEGAL MATTERS

              The legality of the securities offered hereby will be passed upon for the Company by Proskauer Rose LLP, Los Angeles, California and Venable LLP, Baltimore, Maryland. Certain legal matters in connection with the offering will be passed upon for the underwriters, if any, by the counsel named in the prospectus supplement.


INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

              KPMG LLP, located at 355 South Grand Avenue, Los Angeles, California 90071, is the independent registered public accounting firm of the Company.

              KPMG LLP, located at 2001 M Street, NW, Washington, D.C. 20036, is the independent registered public accounting firm of Allied Capital Corporation.


AVAILABLE INFORMATION

              We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to the securities offered by this prospectus. The registration statement contains additional information about us and the securities being offered by this prospectus.

              We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. This information is available free of charge by calling us collect at (310) 201-4200 or on our website at www.arescapitalcorp.com. You also may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549, the SEC's Northeast Regional Office at 3 World Financial Center, Suite 400, New York, NY 10281 and the SEC's Midwest Regional Office at 175 W. Jackson Blvd., Suite 900, Chicago, IL 60604. Such information is also available from the EDGAR database on the SEC's web site at http://www.sec.gov. You also can obtain copies of such information, after paying a duplicating fee, by sending a request by e-mail to publicinfo@sec.gov or by writing the SEC's Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, D.C. 20549. You may obtain information on the operation of the SEC's Public Reference Room by calling the SEC at (202) 551-8090 or (800) SEC-0330.

              The information we file with the SEC is available free of charge by contacting us at 280 Park Avenue, 22nd Floor, Building East, New York, NY 10017 or by telephone at (212) 750-7300 or on our website at www.arescapitalcorp.com. Information contained on our website is not incorporated into this document and you should not consider such information to be part of this document.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ARES CAPITAL

     

Audited Annual Financial Statements

     

Report of Independent Registered Public Accounting Firm

  F-2  

Consolidated Balance Sheets as of December 31, 2008 and 2007

  F-3  

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

  F-4  

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

  F-5  

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

  F-34  

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

  F-35  

Notes to Consolidated Financial Statements

  F-36  

Interim Financial Statements

     

Consolidated Balance Sheet as of September 30, 2009 (unaudited) and December 31, 2008

  F-60  

Consolidated Statement of Operations for the nine months ended September 30, 2009 (unaudited) and September 30, 2008 (unaudited)

  F-61  

Consolidated Schedule of Investments as of September 30, 2009 (unaudited) and December 31, 2008

  F-62  

Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2009 (unaudited)

  F-95  

Consolidated Statement of Cash Flows for the nine months ended September 30, 2009 (unaudited) and September 30, 2008 (unaudited)

  F-96  

Notes to Consolidated Financial Statements (unaudited)

  F-97  

ALLIED CAPITAL

     

Audited Annual Financial Statements

     

Report of Independent Registered Public Accounting Firm

  F-119  

Consolidated Balance Sheets as of December 31, 2008 and 2007

  F-120  

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

  F-121  

Consolidated Statement of Changes in Net Assets for the years ended December 31, 2008, 2008 and 2006

  F-122  

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

  F-123  

Consolidated Statement of Investments as of December 31, 2008

  F-124  

Consolidated Statement of Investments as of December 31, 2007

  F-137  

Notes to Consolidated Financial Statements

  F-152  

Report of Independent Registered Public Accounting Firm

  F-190  

Schedule 12-14—Investments In and Advances to Affiliates for the year ended December 31, 2008

  F-191  

Interim Financial Statements

     

Consolidated Balance Sheet as of September 30, 2009 (unaudited) and December 31, 2008

  F-196  

Consolidated Statement of Operations for the nine months ended September 30, 2009 (unaudited) and September 30, 2008 (unaudited)

  F-197  

Consolidated Statement of Changes in Net Assets for the nine months ended September 30, 2009 (unaudited) and September 30, 2008 (unaudited)

  F-198  

Consolidated Statement of Cash Flows for the nine months ended September 30, 2009 (unaudited) and September 30, 2008 (unaudited)

  F-199  

Consolidated Statement of Investments as of September 30, 2009 (unaudited)

  F-200  

Consolidated Statement of Investments as of December 31, 2008

  F-209  

Notes to Consolidated Financial Statements (unaudited)

  F-220  

Report of Independent Registered Public Accounting Firm

  F-253  

F-1



Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Ares Capital Corporation:

              We have audited the accompanying consolidated balance sheets of Ares Capital Corporation (and subsidiaries) (the Company) as of December 31, 2008 and 2007, including the consolidated schedule of investments as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

              We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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

              We also have audited, in accordance with the standards of the Public Accounting Oversight Board (United States), Ares Capital Corporation's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of Treadway Commission, and our report dated March 2, 2009 expressed an unqualified opinion on the effectiveness of Ares Capital Corporation's internal control over financial reporting.

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

LOGO

Los Angeles, California
March 2, 2009

F-2



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except per share data)

 
  As of  
 
  December 31, 2008   December 31, 2007  

ASSETS

             

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

             
 

Non-controlled/non-affiliate investments

  $ 1,477,492   $ 1,167,200  
 

Non-controlled affiliate company investments

    329,326     430,371  
 

Controlled affiliate company investments

    166,159     176,631  
           
 

Total investments at fair value

    1,972,977     1,774,202  

Cash and cash equivalents

    89,383     21,142  

Receivable for open trades

    3     1,343  

Interest receivable

    17,547     23,730  

Other assets

    11,423     8,988  
           

Total assets

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

LIABILITIES

             

Debt

  $ 908,786   $ 681,528  

Dividend payable

    40,804      

Management and incentive fees payable

    32,989     13,041  

Accounts payable and other liabilities

    10,006     5,516  

Interest and facility fees payable

    3,869     4,769  
           

Total liabilities

    996,454     704,854  
           

Commitments and contingencies (Note 7)

             

STOCKHOLDERS' EQUITY

             

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

    97     73  

Capital in excess of par value

    1,395,958     1,136,599  

Accumulated undistributed net investment income

    (7,637 )   7,005  

Accumulated net realized gain on sale of investments

    (124 )   1,471  

Net unrealized (depreciation) appreciation on investments

    (293,415 )   (20,597 )
           

Total stockholders' equity

    1,094,879     1,124,551  
           

Total liabilities and stockholders' equity

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

NET ASSETS PER SHARE

  $ 11.27   $ 15.47  
           

See accompanying notes to consolidated financial statements.

F-3



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(dollar amounts in thousands, except per share data)

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

INVESTMENT INCOME:

                   
 

From non-controlled/non-affiliate company investments:

                   
 

Interest from investments

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

Capital structuring service fees

    16,421     12,474     14,634  
 

Interest from cash & cash equivalents

    1,625     2,946     2,420  
 

Dividend income

    1,621     1,880     2,228  
 

Other income

    3,244     1,054     552  
               
   

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

    192,430     153,499     105,476  
 

From non-controlled affiliate company investments:

                   
 

Interest from investments

    28,532     21,413     11,230  
 

Capital structuring service fees

    1,821     2,635     1,384  
 

Dividend income

    825     1,224      
 

Management fees

    750     750      
 

Other income

    847     381     230  
               
   

Total investment income from non-controlled affiliate company investments

    32,775     26,403     12,844  
 

From controlled affiliate company investments:

                   
 

Interest from investments

    10,420     5,876     1,459  
 

Capital structuring service fees

    3,000     2,899      
 

Dividend income

    133     121     242  
 

Management fees

    1,628     45      
 

Other income

    75     30      
               
   

Total investment income from controlled affiliate company investments

    15,256     8,971     1,701  
               
 

Total investment income

    240,461     188,873     120,021  
               

EXPENSES:

                   
 

Interest and credit facility fees

    36,515     36,889     18,584  
 

Base management fees

    30,463     23,531     13,646  
 

Incentive management fees

    31,748     23,522     19,516  
 

Professional fees

    5,990     4,907     3,016  
 

Insurance

    1,271     1,081     866  
 

Administrative

    2,701     997     953  
 

Depreciation

    503     410     259  
 

Directors fees

    337     280     250  
 

Interest to the Investment Adviser

            26  
 

Other

    3,693     3,133     1,342  
               
 

Total expenses

    113,221     94,750     58,458  

NET INVESTMENT INCOME BEFORE INCOME TAXES

    127,240     94,123     61,563  
               

Income tax expense, including excise tax

    248     (826 )   4,931  
               

NET INVESTMENT INCOME

    126,992     94,949     56,632  
               

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

                   
 

Net realized gains (losses):

                   
 

Non-controlled/non-affiliate company investments

    5,200     2,754     27,569  
 

Non-controlled affiliate company investments

    1,357         47  
 

Controlled affiliate company investment

        3,808      
 

Foreign currency transactions

    (186 )   (18 )    
               
   

Net realized gains

    6,371     6,544     27,616  
 

Net unrealized gains (losses):

                   
 

Non-controlled/non-affiliate company investments

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

Non-controlled affiliate company investments

    (82,457 )   (34,497 )   1,001  
 

Controlled affiliate company investments

    (21,797 )   27,231      
 

Foreign currency transactions

    6     (7 )    
               
   

Net unrealized losses

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

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

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

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

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

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

  $ (1.56 ) $ 1.34   $ 1.58  
               

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

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

See accompanying notes to consolidated financial statements.

F-4



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of December 31, 2008

(dollar amounts in thousands, except per unit data)

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

Capella Healthcare, Inc.
 
Acute care hospital operator
 
Junior secured loan ($70,000 par due 2/2016)
 
13.00%
   
2/29/2008
   
70,000
   
63,000
 
$

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

CT Technologies
Intermediate
Holdings, Inc. and CT
Technologies
Holdings, LLC(6)
 
Healthcare analysis services
 
Preferred stock (7,427 shares)
 
14.00% PIK
   
6/15/2007
   
7,427
   
7,427
 
$

1,000.00

(4)
     

DSI Renal, Inc.
 
Dialysis provider
 
Common stock (9,679 shares)
       
6/15/2007
   
4,000
   
5,382
 
$

556.05

(5)
     
        Common stock (1,546 shares)         6/15/2007           $ (5)      
        Senior secured revolving loan ($142 par due 3/2013)   6.25%
(Base Rate + 3.00%/D)
    4/4/2006     142     127   $ 0.89        
        Senior secured revolving loan ($3,520 par due 3/2013)   3.47%
(Libor + 3.00%/M)
    4/4/2006     3,520     3,168   $ 0.90        
        Senior secured revolving loan ($1,120 par due 3/2013)   3.47%
(Libor + 3.00%/M)
    4/4/2006     1,120     1,008   $ 0.90        
        Senior secured revolving loan ($1,152 par due 3/2013)   4.50%
(Libor + 3.00%/Q)
    4/4/2006     1,152     1,037   $ 0.90        
        Senior secured revolving loan ($1,600 par due 3/2013)   4.50%
(Libor + 3.00%/Q)
    4/4/2006     1,600     1,440   $ 0.90        

F-5


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Senior subordinated note ($29,589 par due 4/2014)   12.00% Cash,
2.00% PIK
    4/4/2006     29,658     21,896   $ 0.74 (4)      
        Senior subordinated note ($26,927 par due 4/2014)   12.00% Cash,
2.00% PIK
    4/4/2006     26,971     19,847   $ 0.73 (2)(4)      
        Senior subordinated note ($12,211 par due 4/2014)   12.00% Cash,
2.00% PIK
    4/4/2006     12,231     9,036   $ 0.74 (3)(4)      

GG Merger Sub I, Inc.
 
Drug testing services
 
Senior secured loan ($23,330 par due 12/2014)
 
7.09%
(Libor + 4.00%/S)
   
12/14/2007
   
22,426
   
18,938
 
$

0.81
       

HCP Acquisition Holdings, LLC(7)
 
Healthcare compliance advisory services
 
Class A units (8,566,824 units)
       
6/26/2008
   
8,567
   
6,500
 
$

0.76

(5)
     

Heartland Dental Care, Inc.
 
Dental services
 
Senior subordinated note ($40,217 par due 8/2013)
 
11.00% Cash,
3.25% PIK
   
7/31/2008
   
40,217
   
40,217
 
$

1.00

(4)
     

MPBP Holdings, Inc.,
Cohr Holdings, Inc. and
MPBP
Acquisition Co., Inc.
 
Healthcare equipment services
 
Junior secured loan ($20,000 par due 1/2014)
 
9.19%
(Libor + 6.25%/S)
   
1/31/2007
   
20,000
   
7,000
 
$

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

MWD Acquisition Sub, Inc.
 
Dental services
 
Junior secured loan ($5,000 par due 5/2012)
 
8.13%
(Libor + 6.25%/M)
   
5/3/2007
   
5,000
   
4,250
 
$

0.85

(3)
     

OnCURE Medical Corp.
 
Radiation oncology care provider
 
Senior subordinated note ($32,176 par due 8/2013)
 
11.00% Cash,
1.50% PIK
   
8/18/2006
   
32,176
   
28,935
 
$

0.90

(4)
     
        Senior secured loan ($3,083 par due 8/2009)   4.75%
(Libor + 3.50%/M)
    8/18/2006     3,083     3,000   $ 0.97 (3)      
        Common stock (857,143 shares)         8/18/2006     3,000     2,713   $ 3.17 (5)      

Passport Health
Communications, Inc.,
Passport Holding Corp.
and Prism Holding
Corp.
 
Healthcare technology provider
 
Senior secured loan ($12,935 par due 5/2014)
 
10.50%
(Libor + 7.50%/S)
   
5/9/2008
   
12,935
   
12,671
 
$

0.98

(15)
     
        Senior secured loan ($11,940 par due 5/2014)   10.50%
(Libor + 7.50%/S)
    5/9/2008     11,940     11,701   $ 0.98 (3)(15)      
        Series A preferred stock (1,594,457 shares)         7/30/2008     9,900     9,902   $ 6.21 (5)      
        Common stock (16,106 shares)         7/30/2008     100     100   $ 6.21 (5)      

PG Mergersub, Inc.
 
Provider of
patient surveys,
management
reports and
national
databases for
the integrated
healthcare
delivery system
 
Senior subordinated loan ($5,000 par due 3/2016)
 
12.50%
   
3/12/2008
   
4,901
   
4,750
 
$

0.95
     

F-6


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Preferred stock (333 shares)         3/12/2008     333     333   $ 1,000.00 (5)      
        Common stock (16,667 shares)         3/12/2008     167     167   $ 10.00 (5)      

The Schumacher Group of Delaware, Inc.
 
Outsourced physician service provider
 
Senior subordinated loan ($35,849 par due 7/2012)
 
11.00% Cash,
2.50% PIK
   
7/18/2008
   
35,849
   
35,849
 
$

1.00

(4)
     

Triad Laboratory Alliance, LLC
 
Laboratory services
 
Senior subordinated note ($15,354 par due 12/2012)
 
12.00% Cash,
1.75% PIK
   
12/21/2005
   
15,354
   
14,894
 
$

0.97

(4)
     
        Senior secured loan ($2,473 par due 12/2011)   4.71%
(Libor + 3.25%/Q)
    12/21/2005     2,473     2,201   $ 0.89 (3)      

VOTC Acquisition Corp.
 
Radiation oncology care provider
 
Senior secured loan ($3,068 par due 7/2012)
 
11.00% Cash,
2.00% PIK
   
6/30/2008
   
3,068
   
3,068
 
$

1.00

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

Education

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

ELC Acquisition Corporation
 
Developer,
manufacturer
and retailer of
educational
products
 
Senior secured loan ($242 par due 11/2012)
 
5.45%
(Libor + 3.25%/Q)
   
11/30/2006
   
243
   
219
 
$

0.90

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

Instituto de Banca y Comercio, Inc.(8)
 
Private school operator
 
Senior secured revolving loan ($1,643 par due 3/2014)
 
5.00%
(Libor + 3.00%/Q)
   
3/15/2007
   
1,643
   
1,643
 
$

1.00
       
        Senior secured loan ($7,500 par due 3/2014)   8.42%
(Libor + 5.00%/Q)
    3/15/2007     7,500     7,500   $ 1.00        
        Senior secured loan ($7,266 par due 3/2014)   8.42%
(Libor + 5.00%/Q)
    3/15/2007     7,266     7,266   $ 1.00        
        Senior secured loan ($4,987 par due 3/2014)   8.42%
(Libor + 5.00%/Q)
    3/15/2007     4,987     4,987   $ 1.00 (2)      

F-7


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Senior secured loan ($11,820 par due 3/2014)   8.42%
(Libor + 5.00%/Q)
    3/15/2007     11,820     11,820   $ 1.00 (3)      
        Senior subordinated loan ($19,641 par due 6/2014)   10.50% Cash,
3.50% PIK
    6/4/2008     19,641     19,641   $ 1.00 (4)      
        Promissory note ($429 par due 9/2015)   6.00%     6/4/2008     429     1,714   $ 4.00        
        Preferred stock (214,286 shares)         6/4/2008     1,018     4,072   $ 19.00 (5)      
        Common stock (214,286 shares)         6/4/2008     54     214   $ 1.00 (5)      

Lakeland Finance, LLC
 
Private school operator
 
Senior secured note ($18,000 par due 12/2012)
 
11.50%
   
12/13/2005
   
18,000
   
16,920
 
$

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

R3 Education, Inc.
(formerly known as
Equinox EIC
Partners, LLC and
MUA Management
Company, Ltd.)(7)(8)
 
Medical school operator
 
Senior secured revolving loan ($3,850 par due 12/2012)
 
8.25%
(Base Rate + 5.00%/D)
   
4/3/2007
   
3,850
   
3,773
 
$

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

Restaurants and Food Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
ADF Capital, Inc. &
ADF Restaurant
Group, LLC
  Restaurant owner and operator   Senior secured revolving loan ($1,381 par due 11/2013)   5.75%
(Base Rate + 2.50%/D)
    11/27/2006     1,381     1,313   $ 0.95        
        Senior secured revolving loan ($2,005 par due 11/2013)   6.61%
(Libor + 3.00% Cash, 0.50% PIK/S)
    11/27/2006     2,005     1,905   $ 0.95 (4)      
        Senior secured loan ($2 par due 11/2012)   12.00%
(Base Rate + 7.5%/D)
    11/27/2006     2     2   $ 1.00        
        Senior secured loan ($1 par due 11/2012)   12.00%
(Base Rate + 7.5%/D)
    11/27/2006     1     1   $ 1.00 (3)      
        Senior secured loan ($22,656 par due 11/2012)   11.61%
(Libor + 7.50% Cash, 1.00% PIK/S)
    11/27/2006     22,912     21,520   $ 0.94 (4)      
        Senior secured loan ($992 par due 11/2012)   11.61%
(Libor + 7.50% Cash, 1.00% PIK/S)
    11/27/2006     992     942   $ 0.95 (2)(4)      

F-8


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Senior secured loan ($11,081 par due 11/2012)   11.61%
(Libor + 7.50% Cash, 1.00% PIK/S)
    11/27/2006     11,075     10,529   $ 0.95 (3)(4)      
        Promissory note ($12,079 par due 11/2016)   10.00% PIK     6/1/2006     12,067     12,067   $ 1.00 (4)      
        Warrants to purchase 0.61 shares         6/1/2006           $ (5)      

Encanto Restaurants, Inc.(8)
 
Restaurant owner and operator
 
Junior secured loan ($21,184 par due 8/2013)
 
7.50% Cash,
3.50% PIK
   
8/16/2006
   
21,184
   
19,084
 
$

0.90

(2)(4)
     
        Junior secured loan ($4,035 par due 8/2013)   7.50% Cash,
3.50% PIK
    8/16/2006     4,035     3,635   $ 0.90 (3)(4)      

OTG Management, Inc.
 
Airport restaurant operator
 
Junior secured loan ($15,312 par due 6/2013)
 
18.00%
(Libor + 11.00% Cash,
4.00% PIK/M)
   
6/19/2008
   
15,312
   
15,312
 
$

1.00

(4)(15)
     
        Warrants to purchase up to 9 shares of common stock                     $ (5)      

Vistar Corporation and
Wellspring Distribution
Corp.
 
Food service distributor
 
Senior subordinated loan ($48,625 par due 5/2015)
 
13.50%
   
5/23/2008
   
48,625
   
46,680
 
$

0.96
       
        Senior subordinated loan ($25,000 par due 5/2015)   13.50%     5/23/2008     25,000     24,000   $ 0.96 (2)      
        Class A non-voting common stock (1,366,120 shares)         5/23/2008     7,500     3,500   $ 2.56 (5)      
                                         
                        172,091     160,490           14.66 %
                                         

Beverage, Food and Tobacco

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Apple & Eve, LLC and
US Juice
Partners, LLC(6)
 
Juice manufacturer
 
Senior secured revolving loan ($8,000 par due 10/2013)
 
7.90%
(Libor + 6.00%/M)
   
10/5/2007
   
8,000
   
6,400
 
$

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

Best Brands Corporation
 
Baked goods manufacturer
 
Senior secured loan ($10,971 par due 12/2012)
 
10.43%
(Libor + 4.50% Cash, 4.50% PIK/M)
   
2/15/2008
   
9,501
   
9,326
 
$

0.86

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

F-9


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Junior secured loan ($12,201 par due 6/2013)   10.00% Cash,
8.00% PIK
    12/14/2006     12,164     10,969   $ 0.90 (3)(4)      

Bumble Bee Foods, LLC and BB Co-Invest LP
 
Canned seafood manufacturer
 
Senior subordinated loan ($40,706 par due 11/2018)
 
16.25%
(12.00% Cash,
4.25% Optional PIK)
   
11/18/2008
   
40,706
   
40,706
 
$

1.00

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

Charter Baking Company, Inc.
 
Baked goods manufacturer
 
Senior subordinated note ($5,547 par due 2/2013)
 
12.00% PIK
   
2/6/2008
   
5,547
   
5,547
 
$

1.00

(2)(4)
     
        Preferred stock (6,258 shares)         9/1/2006     2,500     2,500   $ 399.49 (5)      
                                         
                        174,355     153,655           14.03 %
                                         

Services—Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Diversified Collection Services, Inc.
 
Collections services
 
Senior secured loan ($11,809 par due 8/2011)
 
8.50%
(Libor + 5.75%/M)
   
2/2/2005
   
9,715
   
11,219
 
$

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

GCA Services Group, Inc.
 
Custodial services
 
Senior secured loan ($25,000 par due 12/2011)
 
12.00%
   
12/15/2006
   
25,000
   
25,000
 
$

1.00

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

Growing Family, Inc. and GFH Holdings, LLC
 
Photography services
 
Senior secured revolving loan ($1,513 par due 8/2011)
 
11.34%
(Libor + 3.00% Cash, 4.00% PIK/Q)
   
3/16/2007
   
1,513
   
756
 
$

0.50

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

F-10


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Common stock (552,430 shares)         3/16/2007     872       $ (5)      

NPA Acquisition, LLC
 
Powersport vehicle auction operator
 
Junior secured loan ($12,000 par due 2/2013)
 
8.58%
(Libor + 6.75%/M)
   
8/23/2006
   
12,000
   
12,000
 
$

1.00

(3)
     
        Common units (1,709 shares)         8/23/2006     1,000     2,300   $ 1,345.82 (5)      

Web Services Company, LLC
 
Laundry service and equipment provider
 
Senior subordinated loan ($17,764 par due 8/2016)
 
11.50% Cash,
2.50% PIK
   
8/29/2008
   
17,764
   
17,231
 
$

0.97

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

Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

CIC Flex, LP(9)
 
Investment partnership
 
Limited partnership units (1 unit)
       
9/7/2007
   
28
   
28
 
$

28,000.00

(5)
     

Covestia Capital Partners, LP(9)
 
Investment partnership
 
Limited partnership interest (47% interest)
       
6/17/2008
   
1,059
   
1,059
   
(5)
     

Firstlight Financial Corporation(6)(9)
 
Investment company
 
Senior subordinated loan ($69,910 par due 12/2016)
 
10.00% PIK
   
12/31/2006
   
69,910
   
62,919
 
$

0.90

(4)
     
        Common stock (10,000 shares)         12/31/2006     10,000     0   $ (5)      
        Common stock (30,000 shares)         12/31/2006     30,000     0   $ (5)      

Ivy Hill Middle Market
Credit Fund, Ltd.
(7)(8)(9)
 
Investment company
 
Class B deferrable interest notes ($40,000 par due 11/2018)
 
8.15%
(Libor + 6.00%/Q)
   
11/20/2007
   
40,000
   
36,000
 
$

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

Imperial Capital
Group, LLC and
Imperial Capital Private
Opportunities, LP(6)(9)
 
Investment banking services
 
Limited partnership interest (80% interest)
       
5/10/2007
   
584
   
584
 
$

1.00

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

Partnership Capital Growth Fund I, LP(9)
 
Investment partnership
 
Limited partnership interest (25% interest)
       
6/16/2006
   
2,384
   
2,384
   
(5)
     

Trivergance Capital Partners, LP(9)
 
Investment partnership
 
Limited partnership interest (100% interest)
       
6/5/2008
   
723
   
723
   
(5)
     

VSC Investors LLC(9)
 
Investment company
 
Membership interest (4.63% interest)
       
1/24/2008
   
302
   
302
   
(5)
     
                                         
                        195,023     137,665           12.57 %
                                         

F-11


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

Business Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Booz Allen Hamilton, Inc.   Strategy and technology consulting services   Senior secured loan ($748 par due 7/2015)   7.50%
(Libor + 4.50%/S)
    7/31/2008     733     658   $ 0.88 (3)      
        Senior subordinated loan ($22,400 par due 7/2016)   11.00% Cash,
2.00% PIK
    7/31/2008     22,177     19,040   $ 0.85 (2)(4)      
Investor Group Services, LLC(6)   Financial services   Senior secured revolving loan ($750 par due 6/2011)   6.97%
(Libor + 5.50%/Q)
    6/22/2006     750     750   $ 1.00        
        Limited liability company membership interest (10.00% interest)         6/22/2006         500   $ 5,000.00 (5)      

Pillar Holdings LLC and PHL Holding Co.(6)
 
Mortgage services
 
Senior secured revolving loan ($375 par due 11/2013)
 
7.53%
(Libor + 5.50%/B)
   
11/20/2007
   
375
   
375
 
$

1.00
       
        Senior secured revolving loan ($938 par due 11/2013)   7.53%
(Libor + 5.50%/B)
    11/20/2007     938     938   $ 1.00        
        Senior secured loan ($7,375 par due 5/2014)   14.50%     7/31/2008     7,375     7,375   $ 1.00        
        Senior secured loan ($18,709 par due 11/2013)   7.53%
(Libor + 5.50%/B)
    11/20/2007     18,709     18,709   $ 1.00 (2)      
        Senior secured loan ($11,678 par due 11/2013)   7.53%
(Libor + 5.50%/B)
    11/20/2007     11,678     11,678   $ 1.00 (3)      
        Common stock (85 shares)         11/20/2007     3,768     5,267   $ 61,964.71 (5)      

Primis Marketing Group, Inc. and Primis Holdings, LLC(6)
 
Database marketing services
 
Senior subordinated note ($10,222 par due 2/2013)
 
11.00% Cash,
2.50% PIK
   
8/24/2006
   
10,222
   
1,022
 
$

0.10

(4)(14)
     
        Preferred units (4,000 units)         8/24/2006     3,600       $ (5)      
        Common units (4,000,000 units)         8/24/2006     400       $ (5)      

Prommis
Solutions, LLC,
E-Default Services, LLC,
Statewide Tax and Title
Services, LLC &
Statewide Publishing
Services, LLC (formerly
known as MR
Processing Holding
Corp.)
 
Bankruptcy and foreclosure processing services
 
Senior subordinated note ($26,007 par due 2/2014)
 
11.50% Cash,
2.00% PIK
   
2/8/2007
   
26,007
   
24,713
 
$

0.95

(4)
     
        Senior subordinated note ($26,109 par due 2/2014)   11.50% Cash,
2.00% PIK
    2/8/2007     26,109     24,810   $ 0.95 (2)(4)      
        Preferred stock (30,000 shares)         4/11/2006     3,000     4,000   $ 133.33 (5)      

R2 Acquisition Corp.
 
Marketing services
 
Common stock (250,000 shares)
       
5/29/2007
   
250
   
250
 
$

1.00

(5)
     

Summit Business Media, LLC
 
Business media consulting services
 
Junior secured loan ($10,000 par due 11/2013)
 
9.47%
(Libor + 7.00%/M)
   
8/3/2007
   
10,000
   
6,000
 
$

0.60

(3)
   

F-12


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

VSS-Tranzact Holdings, LLC(6)
 
Management consulting services
 
Common membership interest (8.51% interest)
       
10/26/2007
   
10,000
   
6,000
   
(5)
     
                                         
                        156,091     132,085           12.06 %
                                         

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Apogee Retail, LLC   For-profit thrift retailer   Senior secured revolving loan ($390 par due 3/2012)   7.25%
(Base Rate + 4.00%/D)
    3/27/2007     390     390   $ 1.00        
        Senior secured loan ($10,960 par due 11/2012)   12.00% Cash,
4.00% PIK
    5/28/2008     10,960     10,960   $ 1.00 (4)      
        Senior secured loan ($2,307 par due 3/2012)   8.71%
(Libor + 5.25%/S)
    3/27/2007     2,307     2,053   $ 0.89        
        Senior secured loan ($24,637 par due 3/2012)   8.71%
(Libor + 5.25%/S)
    3/27/2007     24,637     21,927   $ 0.89 (2)      
        Senior secured loan ($11,790 par due 3/2012)   8.71%
(Libor + 5.25%/S)
    3/27/2007     11,790     10,493   $ 0.89 (3)      
        Senior secured loan ($4,876 par due 3/2012)   7.64%
(Libor + 5.25%/Q)
    3/27/2007     4,876     4,340   $ 0.89        

Dufry AG(8)
 
Retail newstand operator
 
Common stock (39,056 shares)
       
3/28/2008
   
3,000
   
1,050
 
$

26.88

(5)
     

Savers, Inc. and SAI
Acquisition Corporation
 
For-profit thrift retailer
 
Senior subordinated note ($6,000 par due 8/2014)
 
10.00% Cash,
2.00% PIK
   
8/8/2006
   
6,000
   
5,700
 
$

0.95

(4)
     
        Senior subordinated note ($22,000 par due 8/2014)   10.00% Cash,
2.00% PIK
    8/8/2006     22,000     20,900   $ 0.95 (2)(4)      
        Common stock (1,170,182 shares)         8/8/2006     4,500     5,301   $ 4.53 (5)      

Things
Remembered, Inc. and
TRM Holdings
Corporation
 
Personalized gifts retailer
 
Senior secured loan ($4,506 par due 9/2012)
 
7.00%
(Base Rate + 3.75%/D)
   
9/28/2006
   
4,506
   
3,470
 
$

0.77

(3)
     
        Senior secured loan ($25,192 par due 9/2012)   15.00%
(Base Rate + 9.75%/D)
    9/28/2006     25,189     18,651   $ 0.74 (2)      
        Senior secured loan ($3,095 par due 9/2012)   15.00%
(Base Rate + 9.75%/D)
    9/28/2006     3,094     2,291   $ 0.74        
        Senior secured loan ($7,273 par due 9/2012)   15.00%
(Base Rate + 9.75%/D)
    9/28/2006     7,273     5,385   $ 0.74 (3)      
        Preferred stock (80 shares)         9/28/2006     1,800       $ (5)      
        Common stock (800 shares)         9/28/2006     200       $ (5)      
                                         
                        132,522     112,911           10.31 %
                                         

Environmental Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
AWTP, LLC   Water treatment services   Junior secured loan ($402 par due 12/2012)   8.97%
(Libor + 7.50% Cash,
1.00% PIK/Q)
    12/23/2005     402     322   $ 0.80 (4)      
        Junior secured loan ($3,018 par due 12/2012)   8.97%
(Libor + 7.50% Cash,
1.00% PIK/Q)
    12/23/2005     3,018     2,414   $ 0.80 (3)(4)      

F-13


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Junior secured loan ($805 par due 12/2012)   11.48%
(Libor + 7.50% Cash,
1.00% PIK/A)
    12/23/2005     805     644   $ 0.80 (4)      
        Junior secured loan ($6,036 par due 12/2012)   11.48%
(Libor + 7.50% Cash,
1.00% PIK/A)
    12/23/2005     6,036     4,829   $ 0.80 (3)(4)      
        Junior secured loan ($402 par due 12/2012)   9.35%
(Libor + 7.50% Cash,
1.00% PIK/A)
    12/23/2005     402     322   $ 0.80 (4)      
        Junior secured loan ($3,018 par due 12/2012)   9.35%
(Libor + 7.50% Cash,
1.00% PIK/A)
    12/23/2005     3,018     2,414   $ 0.80 (3)(4)      
Mactec, Inc.   Engineering and environmental services   Class B-4 stock (16 shares)         11/3/2004           $ 27.00 (5)      
        Class C stock (5,556 shares)         11/3/2004         150   $ 27.00 (5)      

Sigma International Group, Inc.
 
Water treatment parts manufacturer
 
Junior secured loan ($1,833 par due 10/2013)
 
9.55%
(Libor + 7.50%/Q)
   
10/11/2007
   
1,833
   
1,558
 
$

0.85

(2)
     
        Junior secured loan ($4,000 par due 10/2013)   9.55%
(Libor + 7.50%/Q)
    10/11/2007     4,000     3,400   $ 0.85 (3)      
        Junior secured loan ($2,750 par due 10/2013)   7.97%
(Libor + 7.50/M)
    11/1/2007     2,750     2,338   $ 0.85 (2)      
        Junior secured loan ($6,000 par due 10/2013)   7.97%
(Libor + 7.50/M)
    11/1/2007     6,000     5,100   $ 0.85 (3)      
        Junior secured loan ($917 par due 10/2013)   9.40%
(Libor + 7.50%/M)
    11/6/2007     917     779   $ 0.85 (2)      
        Junior secured loan ($2,000 par due 10/2013)   9.40%
(Libor + 7.50%/M)
    11/6/2007     2,000     1,700   $ 0.85 (3)      

Waste Pro USA, Inc.
 
Waste management services
 
Senior subordinated loan ($25,000 par due 11/2013)
 
11.50%
   
11/9/2006
   
25,000
   
25,000
 
$

1.00

(2)
     
        Preferred stock (15,000 shares)   10.00% PIK     11/9/2006     15,000     15,000   $ 1,000.00 (4)      
        Warrants to purchase 682,671 shares         11/9/2006         6,827   $ 10.00 (5)      

Wastequip, Inc.(6)
 
Waste management equipment manufacturer
 
Senior subordinated loan ($12,990 par due 2/2015)
 
10.00% Cash,
2.00% PIK
   
2/5/2007
   
12,990
   
7,715
 
$

0.59

(4)
     
        Common stock (13,889 shares)         2/2/2007     1,389     131   $ 9.43 (5)      
                                         
                        85,560     80,643           7.37 %
                                         

Printing, Publishing and Media

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Canon Communications LLC   Print publications services   Junior secured loan ($11,784 par due 11/2011)   13.00%
(Base Rate + 9.75%/D)
    5/25/2005     11,784     11,313   $ 0.96 (2)(15)      
        Junior secured loan ($12,009 par due 11/2011)   13.00%
(Base Rate + 9.75%/D)
    5/25/2005     12,009     11,529   $ 0.96 (3)(15)      

Courtside Acquisition Corp.
 
Community newspaper publisher
 
Senior subordinated loan ($34,295 par due 6/2014)
 
17.00% PIK
   
6/29/2007
   
34,295
   
3,430
 
$

0.10

(4)(14)
   

F-14


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

LVCG Holdings LLC(7)
 
Commercial printer
 
Membership interests (56.53% interest)
       
10/12/2007
   
6,600
   
8,500
   
(5)
     

National Print Group, Inc.
 
Printing management services
 
Senior secured revolving loan ($2,736 par due 3/2012)
 
8.25%
(Base Rate + 5.00%/D)
   
3/2/2006
   
2,736
   
2,462
 
$

0.90

(15)
     
        Senior secured loan ($8,623 par due 3/2012)   7.50%
(Base Rate + 4.25%/D)
    3/2/2006     8,623     7,761   $ 0.90 (3)(15)      
        Preferred stock (9,344 shares)         3/2/2006     2,000       $ (5)      
The Teaching
Company, LLC and
The Teaching Company
Holdings, Inc.(11)
  Education media provider   Senior secured loan ($18,000 par due 9/2012)   11.70%     9/29/2006     18,000     17,100   $ 0.95 (2)      
        Senior secured loan ($10,000 par due 9/2012)   11.70%     9/29/2006     10,000     9,500   $ 0.95 (3)      
        Preferred stock (29,969 shares)         9/29/2006     2,997     3,996   $ 133.34 (5)      
        Common stock (15,393 shares)         9/29/2006     3     4   $ 0.26 (5)      
                                         
                        109,047     75,595           6.90 %
                                         

Manufacturing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Arrow Group Industries, Inc.   Residential and outdoor shed manufacturer   Senior secured loan ($5,616 par due 4/2010)   6.46%
(Libor + 5.00%/Q)
    3/28/2005     5,647     5,372   $ 0.96 (3)(15)      

Emerald Performance
Materials, LLC
 
Polymers and performance materials manufacturer
 
Senior secured loan ($9,018 par due 5/2011)
 
8.25%
(Libor + 4.25%/A)
   
5/16/2006
   
9,018
   
8,567
 
$

0.95

(3)(15)
     
        Senior secured loan ($626 par due 5/2011)   6.75%
(Base Rate + 3.50%/D)
    5/16/2006     626     595   $ 0.95 (3)(15)      
        Senior secured loan ($536 par due 5/2011)   8.25%
(Libor + 4.25%/A)
    5/16/2006     536     509   $ 0.95 (3)(15)      
        Senior secured loan ($1,523 par due 5/2011)   10.00%
(Libor + 6.00%/A)
    5/16/2006     1,523     1,447   $ 0.95 (3)(15)      
        Senior secured loan ($81 par due 5/2011)   10.00%
(Libor + 6.00%/A)
    5/16/2006     81     77   $ 0.95 (3)(15)      
        Senior secured loan ($4,537 par due 5/2011)   10.00% Cash,
3.00% PIK
    5/16/2006     4,546     4,319   $ 0.95 (2)(4)      
        Senior secured loan ($241 par due 5/2011)   10.00% Cash,
3.00% PIK
    5/16/2006     241     229   $ 0.95 (2)(4)      

Qualitor, Inc.
 
Automotive aftermarket components supplier
 
Senior secured loan ($1,756 par due 12/2011)
 
5.46%
(Libor + 4.00%/Q)
   
12/29/2004
   
1,752
   
1,664
 
$

0.95

(3)
     
        Senior secured loan ($5 par due 12/2011)               5     5     1.00 (3)      
        Junior secured loan ($5,000 par due 6/2012)   8.46%
(Libor + 7.00%/Q)
    12/29/2004     5,000     4,750   $ 0.95 (3)      

F-15


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

Reflexite Corporation(7)
 
Developer and manufacturer of high-visibility reflective products
 
Senior subordinated loan ($10,253 par due 2/2015)
 
11.00% Cash,
3.00% PIK
   
2/28/2008
   
10,253
   
10,253
 
$

1.00

(4)
     
        Common stock (1,821,860 shares)         3/28/2006     27,435     35,500   $ 19.49 (5)      

Saw Mill PCG Partners LLC
 
Precision components manufacturer
 
Common units (1,000 units)
       
2/2/2007
   
1,000
   
0
 
$


(5)
     

UL Holding Co., LLC
 
Petroleum product manufacturer
 
Common units (50,000 units)
       
4/25/2008
   
500
   
750
 
$

15.00

(5)
     
        Common units (50,000 units)         4/25/2008           $ (5)      
Universal Trailer Corporation(6)   Livestock and specialty trailer manufacturer   Common stock (74,920 shares)         10/8/2004     7,930       $ (5)      
                                         
                        76,093     74,037           6.76 %
                                         

Aerospace & Defense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
AP Global Holdings, Inc.   Safety and security equipment manufacturer   Senior secured loan ($7,898 par due 10/2013)   4.97%
(Libor + 4.50%/M)
    11/8/2007     7,799     7,121   $ 0.90 (3)      

ILC Industries, Inc.
 
Industrial products provider
 
Junior secured loan ($12,000 par due 8/2012)
 
11.50%
   
6/27/2006
   
12,000
   
12,000
 
$

1.00

(3)
     

Thermal Solutions LLC
and TSI Group, Inc.
 
Thermal management and electronics packaging manufacturer
 
Senior secured loan ($871 par due 3/2011)
 
3.92%
(Libor + 3.50%/M)
   
3/28/2005
   
871
   
836
 
$

0.96

(3)
     
        Senior secured loan ($2,765 par due 3/2012)   4.42%
(Libor + 4.00%/M)
    3/28/2005     2,765     2,461   $ 0.89 (3)      
        Senior subordinated notes ($2,117 par due 9/2012)   11.50% Cash,
2.75% PIK
    3/28/2005     2,117     2,043   $ 0.97 (4)      
        Senior subordinated notes ($3,342 par due 9/2012)   11.50% Cash,
2.75% PIK
    3/28/2005     3,342     3,225   $ 0.96 (2)(4)      
        Senior subordinated notes ($2,679 par due 3/2013)   11.50% Cash,
2.50% PIK
    3/21/2006     2,679     2,599   $ 0.97 (2)(4)      
        Preferred stock (71,552 shares)         3/28/2005     716     716   $ 10.00 (5)      
        Common stock (1,460,246 shares)         3/28/2005     15     15   $ 0.01 (5)      

Wyle Laboratories, Inc.
and Wyle Holdings, Inc.
 
Provider of specialized engineering, scientific and technical services
 
Junior secured loan ($16,000 par due 7/2014)
 
8.96%
(Libor + 7.50%/Q)
   
1/17/2008
   
16,000
   
15,200
 
$

0.95
       
        Junior secured loan ($12,000 par due 7/2014)   8.96%
(Libor + 7.50%/Q)
    1/17/2008     12,000     11,400   $ 0.95 (3)      

F-16


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Common stock (246,279 shares)         1/17/2008     2,100     1,680   $ 6.82 (5)      
                                         
                        62,404     59,296           5.42 %
                                         

Consumer Products—Non-Durable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Innovative Brands, LLC   Consumer products and personal care manufacturer   Senior secured loan ($9,901 par due 9/2011)   14.50%     10/12/2006     9,901     9,901   $ 1.00        
        Senior secured loan ($9,139 par due 9/2011)   14.50%     10/12/2006     9,139     9,139   $ 1.00 (3)      

Making Memories Wholesale, Inc.(6)
 
Scrapbooking branded products manufacturer
 
Senior secured loan ($21,509 par due 3/2011)
 
10.00%
(Base Rate + 5.00%/D)
   
5/5/2005
   
11,953
   
12,087
 
$

0.56

(14)
     
        Senior subordinated loan ($10,465 par due 5/2012)   12.00% Cash,
4.00% PIK
    5/5/2005     10,465       $ (4)(14)      
        Preferred stock (4,259 shares)         5/5/2005     3,759       $ (5)      

Shoes for Crews, LLC
 
Safety footwear and slip-related mat manufacturer
 
Senior secured revolving loan ($1,000 par due 7/2010)
 
5.25%
(Base Rate + 2.00%/D)
   
10/8/2004
   
1,000
   
1,000
 
$

1.00
       
        Senior secured loan ($572 par due 7/2010)   5.31%
(Libor + 3.50%/S)
    10/8/2004     572     572   $ 1.00 (3)      
        Senior secured loan ($88 par due 7/2010)   4.96%
(Libor + 3.50%/Q)
    10/8/2004     88     88   $ 1.00 (3)      

The Thymes, LLC(7)
 
Cosmetic products manufacturer
 
Preferred stock (6,283 shares)
 
8.00% PIK
   
6/21/2007
   
6,283
   
5,026
 
$

799.94

(4)
     
        Common stock (5,400 shares)         6/21/2007           $ (5)      

Wear Me Apparel, LLC(6)
 
Clothing manufacturer
 
Senior subordinated notes ($23,985 par due 4/2013)
 
17.50% PIK
   
4/2/2007
   
24,035
   
12,055
 
$

0.50

(4)(14)
     
        Common stock (10,000 shares)         4/2/2007     10,000       $ (5)      
                                         
                        87,195     49,868           4.55 %
                                         

Telecommunications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
American Broadband
Communications, LLC
and American
Broadband Holding
Company
  Broadband communication services   Senior subordinated loan ($32,048 par due 11/2014)   10.00% Cash,
6.00% PIK
    2/8/2008     32,048     32,048   $ 1.00 (4)      
        Senior subordinated loan ($8,087 par due 11/2014)   10.00% Cash,
6.00% PIK
    11/7/2007     8,087     8,087   $ 1.00 (4)      
        Warrants to purchase 170 shares         11/7/2007           $ (5)      
                                         
                        40,135     40,135           3.67 %
                                         

Cargo Transport

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
The Kenan Advantage
Group, Inc.
  Fuel transportation provider   Senior subordinated notes ($25,266 par due 12/2013)   9.50% Cash,
3.50% PIK
    12/15/2005     25,260     24,000   $ 0.95 (2)(4)      
        Senior secured loan ($2,426 par due 12/2011)   4.46%
(Libor + 3.00%/Q)
    12/15/2005     2,425     2,183   $ 0.90 (3)      

F-17


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Preferred stock (10,984 shares)   8.00% PIK     12/15/2005     1,371     1,732   $ 157.68 (4)(5)      
        Common stock (30,575 shares)         12/15/2005     31     41   $ 1.34 (5)      
                                         
                        29,087     27,956           2.55 %
                                         

Containers-Packaging

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Industrial Container
Services, LLC(6)
  Industrial container manufacturer, reconditioner and servicer   Senior secured revolving loan ($1,198 par due 9/2011)   5.75%
(Base Rate + 2.50%/D)
    6/21/2006     1,198     1,198   $ 1.00        
        Senior secured revolving loan ($1,239 par due 9/2011)   4.47%
(Libor + 4.00%/M)
    6/21/2006     1,239     1,239   $ 1.00        
        Senior secured loan ($42 par due 9/2011)   4.47%
(Libor + 4.00%/B)
    9/30/2005     42     42   $ 1.00 (2)      
        Senior secured loan ($516 par due 9/2011)   4.46%
(Libor + 4.00%/M)
    6/21/2006     516     516   $ 1.00 (2)      
        Senior secured loan ($7,902 par due 9/2011)   4.46%
(Libor + 4.00%/M)
    6/21/2006     7,902     7,902   $ 1.00 (3)      
        Senior secured loan ($85 par due 9/2011)   5.20%
(Libor + 4.00%/M)
    6/21/2006     85     85   $ 1.00 (2)      
        Senior secured loan ($1,309 par due 9/2011)   5.20%
(Libor + 4.00%/M)
    6/21/2006     1,309     1,309   $ 1.00 (3)      
        Senior secured loan ($263 par due 9/2011)   5.20%
(Libor + 4.00%/M)
    6/21/2006     263     263   $ 1.00 (2)      
        Senior secured loan ($4,028 par due 9/2011)   5.20%
(Libor + 4.00%/M)
    6/21/2006     4,028     4,028   $ 1.00 (3)      
        Senior secured loan ($105 par due 9/2011)   5.88%
(Libor + 4.00%/M)
    6/21/2006     105     105   $ 1.00 (2)      
        Senior secured loan ($1,611 par due 9/2011)   5.88%
(Libor + 4.00%/M)
    6/21/2006     1,611     1,611   $ 1.00 (3)      
        Common stock (1,800,000 shares)         9/29/2005     1,800     9,100   $ 5.06 (5)      
                                         
                        20,098     27,398           2.50 %
                                         

Computers and Electronics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
RedPrairie Corporation   Software manufacturer   Junior secured loan ($3,300 par due 1/2013)   9.21%
(Libor + 6.50%/Q)
    7/13/2006     3,300     2,970   $ 0.90 (2)      
        Junior secured loan ($12,000 par due 1/2013)   9.21%
(Libor + 6.50%/Q)
    7/13/2006     12,000     10,800   $ 0.90 (3)      

X-rite, Incorporated
 
Color management solutions provider
 
Junior secured loan ($3,098 par due 7/2013)
 
13.63%
(Libor + 10.38%/D)
   
7/6/2006
   
3,098
   
3,098
 
$

1.00

(15)
     
        Junior secured loan ($7,744 par due 7/2013)   13.63%
(Libor + 10.38%/D)
    7/6/2006     7,744     7,744   $ 1.00 (3)(15)      
                                         
                        26,142     24,612           2.25 %
                                         

F-18


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

Health Clubs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Athletic Club Holdings, Inc.(13)   Premier health club operator   Senior secured loan ($1,000 par due 10/2013)   4.97%
(Libor + 4.5%/M)
    10/11/2007     1,000     880   $ 0.88        
        Senior secured loan ($1,750 par due 10/2013)   8.88%
(Libor + 4.5%/S)
    10/11/2007     1,750     1,540   $ 0.88        
        Senior secured loan ($12,486 par due 10/2013)   5.01%
(Libor + 4.5%/M)
    10/11/2007     12,486     10,988   $ 0.88 (2)      
        Senior secured loan ($11,487 par due 10/2013)   5.01%
(Libor + 4.5%/M)
    10/11/2007     11,487     10,109   $ 0.88 (3)      
        Senior secured loan ($14 par due 10/2013)   6.75%
(Base Rate + 3.50/D)
    10/11/2007     14     12   $ 0.86 (2)      
        Senior secured loan ($13 par due 10/2013)   6.75%
(Base Rate + 3.50/D)
    10/11/2007     13     11   $ 0.85 (3)      
                                         
                        26,750     23,540           2.07 %
                                         

Grocery

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Planet Organic Health Corp.(8)   Organic grocery store operator   Junior secured loan ($860 par due 7/2014)   6.01%
(Libor + 5.50%/M)
    7/3/2007     860     817   $ 0.95        
        Junior secured loan ($10,250 par due 7/2014)   6.01%
(Libor + 5.50%/M)
    7/3/2007     10,250     9,738   $ 0.95 (3)      
        Senior subordinated loan ($10,900 par due 7/2012)   11.00% Cash,
2.00% PIK
    7/3/2007     10,900     9,845   $ 0.90 (2)(4)      
                                         
                        22,010     20,400           1.86 %
                                         

Consumer Products—Durable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Direct Buy Holdings, Inc. and Direct Buy Investors, LP(6)   Membership-based buying club franchisor and operator   Senior secured loan ($2,281 par due 11/2012)   4.97%
(Libor + 4.50%/B)
    12/14/2007     2,189     1,861   $ 0.82        
        Partnership interests (19.31% interest)         11/30/2007     10,000     6,500       (5)      
                                         
                        12,189     8,361           0.76 %
                                         

Housing—Building Materials

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
HB&G Building Products   Synthetic and wood product manufacturer   Senior subordinated loan ($8,956 par due 3/2011)   13.00% Cash,
6.00% PIK
    10/8/2004     8,966     2,251   $ 0.25 (2)(4)(14)      
        Common stock (2,743 shares)         10/8/2004     753       $ (5)      
        Warrants to purchase 4,464 shares         10/8/2004     653       $ (5)      
                                         
                        10,372     2,251           0.00 %
                                         
Total                     $ 2,267,593   $ 1,972,977              
                                         

(1)
Other than our investments in R3 Education, Inc., HCP Acquisition Holdings, LLC, Ivy Hill Middle Market Credit Fund, Ltd., LVCG Holdings LLC, Reflexite Corporation and The Thymes, LLC, we do not "Control" any of our portfolio companies, as defined in the Investment Company Act. In general, under the Investment Company Act, we would "Control" a portfolio company if we owned more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. All of our portfolio company investments are subject to legal restrictions on sales which as of December 31, 2008 represented 180% of the Company's net assets.

(2)
These assets are owned by the Company's wholly owned subsidiary Ares Capital CP, are pledged as collateral for the CP Funding Facility and, as a result, are not directly available to the creditors of the Company to satisfy any obligations of the Company other than Ares Capital CP's obligations under the CP Funding Facility (see Note 8 to the consolidated financial statements).

F-19


(3)
Pledged as collateral for the ARCC CLO. Unless otherwise noted, all other investments are pledged as collateral for the Revolving Credit Facility (see Note 8 to the consolidated financial statements).

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

(5)
Non-income producing at December 31, 2008.

(6)
As defined in the Investment Company Act, we are an "Affiliate" of this portfolio company because we own 5% or more of the portfolio company's outstanding voting securities or we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions during the period for the year ended December 31, 2008 in which the issuer was an Affiliate (but not a portfolio company that we "Control") are as follows (in thousands):

 
Company
  Purchases   Redemptions
(cost)
  Sales
(cost)
  Interest
income
  Capital
structuring
service
fees
  Dividend
income
  Other
income
  Net
realized
gains/losses
  Net
unrealized
gains/losses
 
 

Apple & Eve, LLC and US Juice Partners, LLC

  $ 11,500   $ 10,814   $   $ 4,634   $   $   $ 43   $ 40   $ (12,383 )
 

Carador, PLC

  $   $   $   $   $   $ 825   $   $   $ (3,479 )
 

Campus Management Corp. and Campus Management Acquisition Corp.

  $ 69,193   $ 1,768   $   $ 5,367   $ 1,540   $   $ 112   $   $ 3,048  
 

CT Technologies Intermediate Holdings, Inc. and CT Technologies Holdings, LLC

  $ 4,719   $ 56,822   $   $ 2,573   $   $   $ 340   $ 100   $ 1,382  
 

Daily Candy, Inc.

  $   $ 11,872   $ 10,806   $ 735   $   $   $   $ 1,208   $  
 

Direct Buy Holdings, Inc. and Direct Buy Investors LP

  $   $ 219   $   $ 192   $   $   $   $ 9   $ (3,828 )
 

Firstlight Financial Corporation

  $   $   $   $ 5,854   $   $   $ 750   $   $ (36,991 )
 

Imperial Capital Group, LLC

  $ 584   $   $   $   $   $   $   $   $  
 

Industrial Container Services, LLC

  $ 6,939   $ 16,677   $   $ 1,710   $   $   $ 120   $   $ 4,100  
 

Investor Group Services, LLC

  $ 1,250   $ 1,500   $   $ 24   $   $   $ 55   $   $ 500  
 

Making Memories Wholesale, Inc

  $ 5,942   $ 1,114   $   $ 199   $   $   $   $   $ (6,668 )
 

Pillar Holdings LLC and PHL Holding Co.

  $ 15,807   $ 600   $ 31,865   $ 3,404   $ 281   $   $ 167   $   $ 1,500  
 

Primis Marketing Group, Inc. and Primis Holdings, LLC

  $   $   $   $   $   $   $   $   $ (7,565 )
 

Universal Trailer Corporation

  $   $   $   $   $   $   $   $   $ (700 )
 

VSS-Tranzact Holdings, LLC

  $   $   $   $   $   $   $   $   $ (4,000 )
 

Wastequip, Inc.

  $   $   $   $ 1,424   $   $   $   $   $ (3,318 )
 

Wear Me Apparel, LLC

  $   $   $   $ 2,416   $   $   $ 13   $   $ (14,055 )
(7)
As defined in the Investment Company Act, we are an "Affiliate" of this portfolio company because we own 5% or more of the portfolio company's outstanding voting securities or we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). In addition, as defined in the Investment Company Act, we "Control" this portfolio company because we own more than 25% of the portfolio company's outstanding voting securities or we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions during the period for the year ended December 31, 2008 in which the issuer was both an Affiliate and a portfolio company that we Control are as follows (in thousands):

 
Company
  Purchases   Redemptions (cost)   Sales
(cost)
  Interest
income
  Capital
structuring
service
fees
  Dividend
income
  Other
income
  Net
realized
gains/losses
  Net
unrealized
gains/losses
 
 

HCP Acquisition Holdings, LLC

  $ 8,567   $   $   $   $   $   $   $   $ (2,067 )
 

Ivy Hill Middle Market Credit Fund, Ltd.

  $   $   $   $ 5,427   $   $   $ 1,528   $   $ (5,600 )
 

LVCG Holdings, LLC

  $   $   $   $   $   $   $ 100   $   $ (1,900 )
 

R3 Education, Inc.

  $ 62,600   $ 69,089   $   $ 3,521   $ 2,900   $   $ 65   $   $ 4,393  
 

Reflexite Corporation

  $ 10,239   $   $   $ 928   $ 100   $   $ 10   $   $ (19,166 )
 

The Thymes, LLC

  $   $   $ 1,450   $ 544   $   $ 133   $   $   $ (1,257 )
(8)
Non-U.S. company or principal place of business outside the U.S. and as a result is not a qualifying asset under Section 55(a) of the Investment Company Act. Under the Investment Company Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.

(9)
Non-registered investment company.

(10)
A majority of the variable rate loans to our portfolio companies bear interest at a rate that may be determined by reference to either Libor or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower's option, which reset annually (A), semi-annually (S), quarterly (Q), bi-monthly (B), monthly (M) or daily (D). For each such loan, we have provided the interest rate in effect at December 31, 2008.

(11)
In addition to the interest earned based on the stated interest rate of this security, we are entitled to receive an additional interest amount of 2.50% on $22.2 million aggregate principal amount of the portfolio company's senior term debt previously syndicated by us.

(12)
Principal amount denominated in Canadian dollars has been translated into U.S. dollars (see Note 2 to the consolidated financial statements).

(13)
In addition to the interest earned based on the stated interest rate of this security, we are entitled to receive an additional interest amount of 2.50% on $25.0 million aggregate principal amount of the portfolio company's senior term debt previously syndicated by us.

(14)
Loan was on non-accrual status as of December 31, 2008.

(15)
Loan includes interest rate floor feature.

See accompanying notes to consolidated financial statements.

F-20



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of December 31, 2007

(dollar amounts in thousands, except per unit data)

Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
Healthcare—Services                                    
American Renal Associates, Inc.   Dialysis provider   Senior secured loan ($2,131 par due 12/2010)   8.36%
(Libor + 3.25%/S)
    12/14/05   $ 2,131   $ 2,131   $ 1.00 (3)      
        Senior secured loan ($16 par due 12/2011)   8.45%
(Libor + 3.25%/Q)
    12/14/05     16     16   $ 1.00 (3)      
        Senior secured loan ($197 par due 12/2010)   9.00%
(Base Rate + 1.75%/D)
    12/14/05     197     197   $ 1.00 (3)      
        Senior secured loan ($5,770 par due 12/2011)   8.36%
(Libor + 3.25%/S)
    12/14/05     5,770     5,770   $ 1.00 (3)      
        Senior secured loan ($28 par due 12/2011)   9.00%
(Base Rate + 1.75%/D)
    12/14/05     28     28   $ 1.00 (3)      
        Senior secured loan ($262 par due 12/2011)   8.36%
(Libor + 3.25%/S)
    12/14/05     262     262   $ 1.00 (3)      
        Senior secured loan ($2,620 par due 12/2011)   8.48%
(Libor + 3.25% /Q)
    12/14/05     2,620     2,620   $ 1.00 (3)      

Capella Healthcare, Inc.

 

Acute care hospital operator

 

Junior secured loan ($19,000 par due 11/2013)

 

10.34%
(Libor + 5.50%/Q)

 

 

12/1/05

 

 

19,000

 

 

19,000

 

$

1.00

 

 

 

 
        Junior secured loan ($30,000 par due 11/2013)   10.34%
(Libor + 5.50%/Q)
    12/1/05     30,000     30,000   $ 1.00 (2)      

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

 

Healthcare information management services

 

Senior secured revolving loan ($810 par due 3/2012)

 

10.38%
(Libor + 5.00%/Q)

 

 

6/15/07

 

 

810

 

 

810

 

$

1.00

 

 

 

 
        Senior secured revolving loan ($810 par due 3/2012)   10.25%
(Libor + 5.00%/M)
    6/15/07     810     810   $ 1.00        
        Senior secured revolving loan ($810 par due 3/2012)   10.15%
(Libor + 5.00%/Q)
    6/15/07     810     810   $ 1.00        
        Senior secured loan ($13,000 par due 3/2012)   10.38%
(Libor + 5.00%/S)
    6/15/07     13,000     13,000   $ 1.00        
        Senior secured loan ($4,000 par due 3/2012)   10.38%
(Libor + 5.00%/S)
    6/15/07     4,000     4,000   $ 1.00 (3)      
        Senior secured loan ($6,500 par due 3/2012)   10.25%
(Libor + 5.00%/M)
    6/15/07     6,500     6,500   $ 1.00        
        Senior secured loan ($2,000 par due 3/2012)   10.25%
(Libor + 5.00%/M)
    6/15/07     2,000     2,000   $ 1.00 (3)      
        Senior secured loan ($19,500 par due 3/2012)   10.15%
(Libor + 5.00%/Q)
    6/15/07     19,500     19,500   $ 1.00        
        Senior secured loan ($6,000 par due 3/2012)   10.15%
(Libor + 5.00%/Q)
    6/15/07     6,000     6,000   $ 1.00 (3)      
        Preferred stock (6,000 shares)         6/15/07     6,000     6,000   $ 1,000.00 (5)      

F-21


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Common stock (9,679 shares)         6/15/07     4,000     4,000   $ 413.27 (5)      
        Common stock (1,546 shares)         6/15/07           $ (5)      

DSI Renal, Inc.

 

Dialysis provider

 

Senior subordinated note ($53,933 par due 4/2014)

 

12.00% Cash,
2.00% PIK

 

 

4/4/06

 

 

53,956

 

 

53,933

 

$

1.00

(4)

 

 

 
        Senior subordinated note ($11,576 par due 4/2014)   12.00% Cash,
2.00% PIK
    4/4/06     11,577     11,577   $ 1.00 (4)(3)      
        Senior secured revolving loan ($3,360 par due 3/2013)   10.25%
(Base Rate + 3.00%/D)
    4/4/06     3,360     3,024   $ 0.90        
        Senior secured revolving loan ($1,600 par due 3/2013)   8.19%
(Libor + 3.00%/Q)
    4/4/06     1,600     1,440   $ 0.90        
        Senior secured revolving loan ($1,440 par due 3/2013)   8.13%
(Libor + 3.00%/Q)
    4/4/06     1,440     1,298   $ 0.90        

GG Merger Sub I, Inc.

 

Drug testing services

 

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

 

9.00%
(Libor + 4.00%/S)

 

 

12/14/07

 

 

22,286

 

 

23,330

 

$

1.00

 

 

 

 

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

 

Healthcare equipment services

 

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

 

11.53%
(Libor + 6.25%/Q)

 

 

1/31/07

 

 

20,000

 

 

15,000

 

$

0.75

 

 

 

 
        Junior secured loan ($12,000 par due 1/2014)   11.53%
(Libor + 6.25%/Q)
    1/31/07     12,000     9,000   $ 0.75 (3)      
        Common stock (50,000 shares)         1/31/07     5,000     2,500   $ 50.00 (5)      

MWD Acquisition Sub, Inc.

 

Dental services

 

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

 

11.57%
(Libor + 6.25%/Q)

 

 

5/3/07

 

 

5,000

 

 

5,000

 

$

1.00

 

 

 

 

OnCURE Medical Corp.

 

Radiation oncology care provider

 

Senior subordinated note ($26,055 par due 8/2013)

 

11.00% Cash,
1.50% PIK

 

 

8/18/06

 

 

26,056

 

 

26,056

 

$

1.00

(4)

 

 

 
        Common stock (857,143 shares)         8/18/06     3,000     3,000   $ 3.50 (5)      

Triad Laboratory Alliance, LLC

 

Laboratory services

 

Senior subordinated note ($15,091 par due 12/2012)

 

12.00% cash,
1.75% PIK

 

 

12/21/05

 

 

15,091

 

 

15,091

 

$

1.00

(4)

 

 

 
        Senior secured loan ($6,860 par due 12/2011)   8.08%
(Libor + 3.25%/Q)
    12/21/05     6,860     6,174   $ 0.90        
        Senior secured loan ($2,940 par due 12/2011)   8.08%
(Libor + 3.25%/Q)
    12/21/05     2,940     2,646   $ 0.90 (3)      
                                         
                        313,620     302,523           26.85 %
                                         

Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Abingdon Investments Limited(6)(8)(9)   Investment company   Ordinary shares (948,500 shares)         12/15/06     9,033     7,745   $ 8.17 (5)      

Firstlight Financial Corporation(6)(9)

 

Investment company

 

Senior subordinated loan ($64,927 par due 12/2016)

 

10.00% PIK

 

 

12/31/06

 

 

64,944

 

 

64,944

 

$

1.00

(4)

 

 

 
        Common stock (10,000 shares)         12/31/06     10,000     7,500   $ 750.00 (5)      
        Common stock (30,000 shares)         12/31/06     30,000     22,500   $ 750.00 (5)      

F-22


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

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

 

Investment company

 

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

 

11.00%
(Libor + 6.00%/Q)

 

 

11/20/07

 

 

40,000

 

 

40,000

 

$

1.00

 

 

 

 
        Subordinated notes ($16,000 par due 11/2018)         11/20/07     16,000     16,000   $ 1.00 (5)      

Imperial Capital Group, LLC(6)(9)

 

Investment banking services

 

Common units (7,710 units)

 

 

 

 

5/10/07

 

 

14,997

 

 

14,997

 

$

1,945.16

(5)

 

 

 
        Common units (2,526 units)         5/10/07     3     3   $ 1.00 (5)      
        Common units
(315 units)
        5/10/07           $ 1.00 (5)      

Partnership Capital Growth Fund I, L.P.(9)

 

Investment partnership

 

Limited partnership interest (25% interest)

 

 

 

 

6/16/06

 

 

1,317

 

 

1,317

 

 

 

(5)

 

 

 
                                         
                        186,294     175,006           15.53 %
                                         

Business Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Investor Group Services, LLC(16)   Financial services   Senior secured loan ($1,000 par due 6/2011)   12.00%     6/22/06     1,000     1,000   $ 1.00 (3)      
        Limited liability company membership interest (10.00% interest)         6/22/06           $ (5)      

Miller Heiman, Inc.

 

Sales consulting services

 

Senior secured loan ($1,428 par due 6/2010)

 

8.31%
(Libor + 3.25%/Q)

 

 

6/20/05

 

 

1,428

 

 

1,428

 

$

1.00

(3)

 

 

 
        Senior secured loan ($3,977 par due 6/2012)   8.58%
(Libor + 3.75%/Q)
    6/20/05     3,977     3,977   $ 1.00 (3)      

Pillar Holdings LLC and PHL Holding Co.(6)

 

Mortgage services

 

Senior secured revolving loan ($500 par due 11/2013)

 

10.37%
(Libor + 5.50%/M)

 

 

11/20/07

 

 

500

 

 

500

 

$

1.00

 

 

 

 
        Senior secured loan ($55,000 par due 11/2013)   10.33%
(Libor + 5.50%/Q)
    11/20/07     55,000     55,000   $ 1.00        
        Common stock (97 shares)         11/20/07     4,000     4,000   $ 41,420.73 (5)      

Primis Marketing Group, Inc. and Primis Holdings, LLC(6)

 

Database marketing services

 

Senior subordinated note ($10,222 par due 2/2013)

 

11.00% Cash,
2.50% PIK

 

 

8/24/06

 

 

10,222

 

 

8,586

 

$

0.84

(2)(4)(14)

 

 

 
        Preferred units (4,000 units)         8/24/06     3,600       $ (5)      
        Common units (4,000,000 units)         8/24/06     400       $ (5)      

Prommis Solutions, LLC, E-Default Services, LLC, Statewide Tax and Title Services, LLC & Statewide Publishing Services, LLC (formerly known as MR Processing Holding Corp.)

 

Bankruptcy and foreclosure processing services

 

Senior subordinated note ($21,557 par due 2/2014)

 

11.50% Cash,
2.00% PIK

 

 

2/8/07

 

 

21,557

 

 

21,557

 

$

1.00

(4)

 

 

 
        Senior subordinated note ($29,523 par due 2/2014)   11.50% Cash,
2.00% PIK
    2/8/07     29,523     29,523   $ 1.00 (2)(4)      
        Preferred stock (30,000 shares)         4/11/06     3,000     4,500   $ 150.00 (5)      

F-23


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

R2 Acquisition Corp.

 

Marketing services

 

Common stock (250,000 shares)

 

 

 

 

5/29/07

 

 

250

 

 

250

 

$

1.00

(5)

 

 

 

Summit Business Media, LLC

 

Business media consulting services

 

Junior secured loan ($10,000 par due 11/2013)

 

11.85%
(Libor + 7.00%/M)

 

 

8/3/07

 

 

10,000

 

 

10,000

 

$

1.00

(3)

 

 

 

VSS-Tranzact Holdings, LLC(6)

 

Management Consulting Services

 

Common membership interest (8.51% interest)

 

 

 

 

10/26/07

 

 

10,000

 

 

10,000

 

 

 

(5)

 

 

 
                                         
                        154,457     150,321           13.34 %
                                         

Printing, Publishing and Media

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Canon Communications LLC   Print publications services   Junior secured loan ($7,525 par due 11/2011)   11.60%
(Libor + 6.75%/M)
    5/25/05     7,525     7,525   $ 1.00        
        Junior secured loan ($4,250 par due 11/2011)   11.60%
(Libor + 6.75%/M)
    5/25/05     4,250     4,250   $ 1.00 (2)      
        Junior secured loan ($12,000 par due 11/2011)   11.60%
(Libor + 6.75%/M)
    5/25/05     12,000     12,000   $ 1.00 (3)      

Courtside Acquisition Corp.

 

Community newspaper publisher

 

Senior subordinated loan ($32,280 par due 6/2014)

 

15.00% PIK

 

 

6/29/07

 

 

32,280

 

 

32,280

 

$

1.00

(4)

 

 

 

Daily Candy, Inc.(6)

 

Internet publication provider

 

Senior secured loan ($497 par due 5/2009)

 

9.72%
(Libor + 5.00%/S)

 

 

5/25/06

 

 

573

 

 

497

 

$

1.00

 

 

 

 
        Senior secured loan ($11,629 par due 5/2009)   9.72%
(Libor + 5.00%/S)
    5/25/06     13,399     11,629   $ 1.00 (3)      
        Senior secured loan ($6 par due 5/2009)   9.72%
(Libor + 5.00%/S)
    5/25/06     5     4   $ 1.00        
        Senior secured loan ($107 par due 5/2009)   9.72%
(Libor + 5.00%/S)
    5/25/06     122     106   $ 1.00 (3)      
        Senior secured loan ($3 par due 5/2009)   9.84%
(Libor + 5.00%/Q)
    5/25/06     3     3   $ 1.00        
        Senior secured loan ($66 par due 5/2009)   9.84%
(Libor + 5.00%/Q)
    5/25/06     76     66   $ 1.00 (3)      
        Common stock (1,250,000 shares)         5/25/06     2,375     4,085   $ 3.27 (5)      
        Warrants to purchase 1,381,578 shares         5/25/06     2,625     4,515   $ 3.27 (5)      

LVCG Holdings LLC(7)

 

Commercial printer

 

Membership interest (56.53% interest)

 

 

 

 

10/12/07

 

 

6,600

 

 

6,600

 

$

100.00

(5)

 

 

 

National Print Group, Inc.

 

Printing management services

 

Senior secured revolving loan ($835 par due 3/2012)

 

9.75%
(Base Rate + 2.50%/D)

 

 

3/2/06

 

 

834

 

 

834

 

$

1.00

 

 

 

 
        Senior secured revolving loan ($1,370 par due 3/2012)   8.75%
(Libor + 3.50%/M)
    3/2/06     1,370     1,370   $ 1.00        
        Senior secured loan ($4,775 par due 3/2012)   8.33%
(Libor + 3.50%/Q)
    3/2/06     4,775     4,775   $ 1.00 (3)      
        Senior secured loan ($5,111 par due 3/2012)   8.58%
(Libor + 3.50%/Q)
    3/2/06     5,111     5,111   $ 1.00 (3)      
        Senior secured loan ($406 par due 8/2012)   12.09%
(Libor + 7.00%/B)
    3/2/06     406     406   $ 1.00 (3)      
        Senior secured loan ($350 par due 8/2012)   11.96%
(Libor + 7.00%/Q)
    3/2/06     350     350   $ 1.00 (3)      
        Preferred stock (9,344 shares)         3/2/06     2,000     2,000   $ 214.04 (5)      

F-24


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

The Teaching Company, LLC and The Teaching Company Holdings, Inc.(11)

 

Education publications provider

 

Senior secured loan ($28,000 par due 9/2012)

 

10.50%

 

 

9/29/06

 

 

28,000

 

 

28,000

 

$

1.00

 

 

 

 
        Preferred stock (29,969 shares)         9/29/06     2,997     3,996   $ 133.33 (5)      
        Common stock (15,393 shares)         9/29/06     3     4   $ 0.27 (5)      
                                         
                        127,679     130,406           11.57 %
                                         
Education                                    
ELC Acquisition Corporation   Developer, manufacturer and retailer of educational products   Senior secured loan ($2,707 par due 11/2012)   9.18%
(Libor + 3.75%/Q)
    11/30/06     2,707     2,707   $ 1.00        
        Senior secured loan ($355 par due 11/2012)   9.18%
(Libor + 3.75%/Q)
    11/30/06     355     355   $ 1.00 (3)      
        Junior secured loan ($8,333 par due 11/2013)   12.11%
(Libor + 7.00%/Q)
    11/30/06     8,333     8,333   $ 1.00 (3)      

Equinox EIC Partners, LLC and MUA Management Company, Ltd.(1)(7)

 

Medical school operator

 

Senior secured revolving loan ($3,000 par due 12/2012)

 

11.36%
(Libor + 6.00%/Q)

 

 

4/3/07

 

 

3,000

 

 

3,000

 

$

1.00

 

 

 

 
        Senior secured revolving loan ($3,139 par due 12/2012)   12.75%
(Base Rate + 5.00%/D)
    4/3/07     3,139     3,139   $ 1.00        
        Senior secured revolving loan ($2,000 par due 12/2012)   12.75%
(Base Rate + 5.00%/D)
    4/3/07     2,000     2,000   $ 1.00        
        Senior secured revolving loan ($2,000 par due 12/2012)   11.24%
(Libor + 6.00%/Q)
    4/3/07     2,000     2,000   $ 1.00        
        Senior secured loan ($5,475 par due 12/2012)   10.86%
(Libor + 6.00%/Q)
    4/3/07     5,475     5,475   $ 1.00        
        Senior secured loan ($14,113 par due 12/2012)   11.11%
(Libor + 6.00%/Q)
    9/21/07     14,112     14,112   $ 1.00        
        Senior secured loan ($7,450 par due 12/2012)   11.21%
(Libor + 6.00%/Q)
    4/3/07     7,450     7,450   $ 1.00 (3)      
        Common membership interest (26.27% interest)         9/21/07     15,000     15,000       (5)      

Instituto de Banca y Comercio, Inc.(8)

 

Private school operator

 

Senior secured revolving loan ($1,125 par due 3/2014)

 

8.10%
(Libor + 3.00%/M)

 

 

3/15/07

 

 

1,125

 

 

1,125

 

$

1.00

 

 

 

 
        Senior secured loan ($12,378 par due 3/2014)   9.96%
(Libor + 5.00%/Q)
    3/15/07     12,378     12,378   $ 1.00        
        Senior secured loan ($11,940 par due 3/2014)   9.96%
(Libor + 5.00%/Q)
    3/15/07     11,940     11,940   $ 1.00 (3)      

Lakeland Finance, LLC

 

Private school operator

 

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

 

11.50%

 

 

12/13/05

 

 

18,000

 

 

18,000

 

$

1.00

 

 

 

 
        Senior secured note ($15,000 par due 12/2012)   11.50%     12/13/05     15,000     15,000   $ 1.00 (2)      
                                         
                        122,014     122,014           10.83 %
                                         

F-25


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
Retail                                    
Apogee Retail, LLC   For-profit thrift retailer   Senior secured loan ($9,373 par due 3/2012)   10.39%
(Libor + 5.25%/S)
    3/27/07     9,374     9,374   $ 1.00        
        Senior secured loan ($19,850 par due 3/2012)   10.39%
(Libor + 5.25%/S)
    3/27/07     19,850     19,850   $ 1.00 (2)      
        Senior secured loan ($11,910 par due 3/2012)   10.39%
(Libor + 5.25%/S)
    3/27/07     11,910     11,910   $ 1.00 (3)      

Savers, Inc. and SAI Acquisition Corporation

 

For-profit thrift retailer

 

Senior subordinated note ($28,281 par due 8/2014)

 

10.00% cash,
2.00% PIK

 

 

8/8/06

 

 

28,281

 

 

28,281

 

$

1.00

(2)(4)

 

 

 
        Common stock (1,170,182 shares)         8/8/06     4,500     4,500   $ 3.85 (5)      

Things Remembered, Inc. and TRM Holdings Corporation

 

Personalized gifts retailer

 

Senior secured loan ($4,632 par due 9/2012)

 

9.95%
(Libor + 4.75%/M)

 

 

9/28/06

 

 

4,632

 

 

4,632

 

$

1.00

(3)

 

 

 
        Senior secured loan ($120 par due 9/2012)   11.00%
(Base Rate + 3.75%/D)
    9/28/06     120     120   $ 1.00 (3)      
        Senior secured loan ($14,000 par due 9/2012)   11.20%
(Libor + 6.00%/M)
    9/28/06     14,000     14,000   $ 1.00 (2)      
        Senior secured loan ($14,000 par due 9/2012)   11.20%
(Libor + 6.00%/M)
    9/28/06     14,000     14,000   $ 1.00        
        Senior secured loan ($7,200 par due 9/2012)   11.20%
(Libor + 6.00%/M)
    9/28/06     7,200     7,200   $ 1.00 (3)      
        Preferred stock (80 shares)         9/28/06     1,800     1,800   $ 22,500.00 (5)      
        Common stock (800 shares)         9/28/06     200     200   $ 250.00 (5)      
                                         
                        115,867     115,867           10.28 %
                                         

Beverage, Food and Tobacco

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
3091779 Nova Scotia Inc.(12)   Baked goods manufacturer   Junior secured loan (Cdn$14,000 par due 11/2012)   11.50%     11/2/07     14,850     14,021   $ 1.00 (12)      
        Warrants to purchase 57,545 shares                     $ (5)      

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

 

Juice manufacturer

 

Senior secured revolving loan ($1,846 par due 10/2013)

 

10.93%
(Libor + 6.00%/M)

 

 

10/5/07

 

 

1,846

 

 

1,846

 

$

1.00

 

 

 

 
        Senior secured revolving loan ($1,000 par due 10/2013)   10.93%
(Libor + 6.00%/M)
    10/5/07     1,000     1,000   $ 1.00        
        Senior secured loan ($33,915 par due 10/2013)   10.93%
(Libor + 6.00%/M)
    10/5/07     33,915     33,915   $ 1.00        
        Senior secured loan ($11,970 par due 10/2013)   10.93%
(Libor + 6.00%/M)
    10/5/07     11,970     11,970   $ 1.00 (3)      
        Senior units (50,000 units)         10/5/07     5,000     5,000   $ 100.00 (5)      

Best Brands Corporation

 

Baked goods manufacturer

 

Junior secured loan ($27,115 par due 6/2013)

 

17.23%
(Libor + 12.00%/Q)

 

 

12/14/06

 

 

27,115

 

 

27,115

 

$

1.02

(2)

 

 

 
        Junior secured loan ($12,168 par due 6/2013)   17.23%
(Libor + 12.00%/Q)
    12/14/06     12,168     12,168   $ 1.02 (3)      

F-26


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

Charter Baking Company, Inc.

 

Baked goods manufacturer

 

Preferred stock (6,258 shares)

 

 

 

 

9/1/06

 

 

2,500

 

 

2,500

 

$

399.49

(5)

 

 

 
                                         
                        110,365     109,536           9.72 %
                                         

Services—Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
American Residential Services, LLC   Plumbing, heating and air-conditioning services   Junior secured loan ($20,101 par due 4/2015)   10.00% Cash,
2.00% PIK
    4/17/07     20,101     20,101   $ 1.00 (4)      

Diversified Collection Services, Inc.

 

Collections services

 

Senior secured loan ($874 par due 8/2011)

 

10.60%
(Libor + 5.75%/M)

 

 

2/2/05

 

 

769

 

 

761

 

$

0.87

 

 

 

 
        Senior secured loan ($4,897 par due 8/2011)   10.60%
(Libor + 5.75%/M)
    2/2/05     4,897     4,260   $ 0.87 (3)      
        Senior secured loan ($1,742 par due 2/2011)   13.35%
(Libor + 8.50%/M)
    2/2/05     1,742     1,359   $ 0.78 (2)      
        Senior secured loan ($6,758 par due 8/2011)   13.35%
(Libor + 8.50%/M)
    2/2/05     6,758     5,271   $ 0.78 (3)      
        Preferred stock (14,927 shares)         5/18/06     169       $ (5)      
        Common stock (114,004 shares)         2/2/05     295       $ (5)      

GCA Services Group, Inc.

 

Custodial services

 

Senior secured loan ($30,000 par due 12/2011)

 

12.00%

 

 

12/15/06

 

 

30,000

 

 

30,000

 

$

1.00

(2)

 

 

 
        Senior secured loan ($12,000 par due 12/2011)   12.00%     12/15/06     12,000     12,000   $ 1.00 (3)      

Growing Family, Inc. and GFH Holdings, LLC

 

Photography services

 

Senior secured revolving loan ($500 par due 8/2011)

 

8.02%
(Libor + 3.00%/Q)

 

 

3/16/07

 

 

500

 

 

480

 

$

0.96

 

 

 

 
        Senior secured revolving loan ($763 par due 8/2011)   8.26%
(Libor + 3.00%/Q)
    3/16/07     763     732   $ 0.96        
        Senior secured loan ($367 par due 8/2011)   8.56%
(Libor + 3.50%/Q)
    3/16/07     367     352   $ 0.96        
        Senior secured loan ($9,646 par due 8/2011)   8.56%
(Libor + 3.50%/Q)
    3/16/07     9,646     9,260   $ 0.96 (3)      
        Senior secured loan ($71 par due 8/2011)   8.47%
(Libor + 3.50%/Q)
    3/16/07     71     68   $ 0.96        
        Senior secured loan ($1,854 par due 8/2011)   8.47%
(Libor + 3.50%/Q)
    3/16/07     1,854     1,780   $ 0.96 (3)      
        Senior secured loan ($3,575 par due 8/2011)   10.97%
(Libor + 6.00%/Q)
    3/16/07     3,576     3,147   $ 0.88        
        Senior secured loan ($52 par due 8/2011)   10.97%
(Libor + 6.00%/Q)
    3/16/07     52     46   $ 0.88        
        Common stock (552,430 shares)         3/16/07     872     90   $ 0.16 (5)      

NPA Acquisition, LLC

 

Powersport vehicle auction operator

 

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

 

12.50%
(Base Rate + 5.25%/D)

 

 

8/23/06

 

 

12,000

 

 

12,000

 

$

1.00

(3)

 

 

 
        Common units (1,709 units)         8/23/06     1,000     1,500   $ 877.71 (5)      
                                         
                        107,432     103,207           9.16 %
                                         

F-27


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

Consumer Products—Non-Durable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Badanco Enterprises, Inc.   Luggage manufacturer   Senior secured revolving loan ($2,150 par due 1/2012)   10.50%
(Base Rate + 3.25%/D)
    1/24/07     2,150     2,150   $ 1.00        
        Senior secured loan ($313 par due 1/2012)   10.50%
(Base Rate + 3.25%/D)
    1/24/07     312     312   $ 1.00 (3)      
        Senior secured loan ($5,938 par due 1/2012)   9.37%
(Libor + 4.50%/M)
    1/24/07     5,937     5,937   $ 1.00 (3)      
        Senior secured loan ($4,375 par due 1/2012)   9.39%
(Libor + 4.50%/B)
    1/24/07     4,375     4,375   $ 1.00 (3)      

Innovative Brands, LLC

 

Consumer products and personal care manufacturer

 

Senior Secured Loan ($12,838 par due 9/2011)

 

11.13%

 

 

10/12/06

 

 

12,838

 

 

12,838

 

$

1.00

 

 

 

 
        Senior Secured Loan ($11,880 par due 9/2011)   11.13%     10/12/06     11,880     11,880   $ 1.00 (3)      

Making Memories Wholesale, Inc.(6)

 

Scrapbooking branded products manufacturer

 

Senior secured loan ($7,125 par due 3/2011)

 

9.75%
(Base Rate + 2.50%/D)

 

 

5/5/05

 

 

7,125

 

 

7,125

 

$

1.00

(3)

 

 

 
        Senior subordinated loan ($10,465 par due 5/2012)   12.00% cash,
4.00% PIK
    5/5/05     10,465     6,802   $ 0.65 (2)(4)(14)      
        Preferred stock (3,759 shares)         5/5/05     3,759       $ (5)      

Shoes for Crews, LLC

 

Safety footwear and slip-related mats

 

Senior secured revolving loan ($2,333 par due 7/2010)

 

9.25%
(Base Rate + 2.00%/D)

 

 

6/16/06

 

 

2,333

 

 

2,333

 

$

1.00

 

 

 

 
        Senior secured loan ($971 par due 7/2010)   7.72%
(Libor + 3.00%/S)
    10/8/04     971     971   $ 1.00 (3)      
        Senior secured loan ($75 par due 7/2010)   9.25%
(Base Rate + 2.00%/D)
    10/8/04     75     75   $ 1.00 (3)      

The Thymes, LLC(7)

 

Cosmetic products manufacturer

 

Preferred stock (7,188 shares)

 

8.00% PIK

 

 

6/21/07

 

 

7,189

 

 

7,189

 

$

1,000.02

(4)

 

 

 
        Common stock (6,850 shares)         6/21/07           $ (5)      

Wear Me Apparel, LLC(6)

 

Clothing manufacturer

 

Senior subordinated notes ($22,500 par due 4/2013)

 

12.60% cash,
1.00% PIK

 

 

4/2/07

 

 

22,559

 

 

22,559

 

$

1.00

(2)(4)

 

 

 
        Common stock (10,000 shares)         4/2/07     10,000     2,000   $ 200.00 (5)      
                                         
                        101,968     86,546           7.68 %
                                         
Environmental Services                                    
AWTP, LLC   Water treatment services   Junior secured loan ($1,608 par due 12/2012)   13.43%
(Libor + 8.50%/Q)
    12/23/05     1,612     1,612   $ 1.00        
        Junior secured loan ($12,061 par due 12/2012)   13.43%
(Libor + 8.50%/Q)
    12/23/05     12,061     12,061   $ 1.00 (3)      

Mactec, Inc.

 

Engineering and environmental services

 

Common stock (16 shares)

 

 

 

 

11/3/04

 

 


 

 


 

$

20.78

(5)

 

 

 
        Common stock (5,556 shares)         11/3/04         116   $ 20.78 (5)      

F-28


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

Sigma International Group, Inc.

 

Water treatment parts manufacturer

 

Junior secured loan ($1,833 par due 10/13)

 

12.37%
(Libor + 7.50%/Q)

 

 

10/11/07

 

 

1,834

 

 

1,833

 

$

1.00

 

 

 

 
        Junior secured loan ($4,000 par due 10/13)   12.37%
(Libor + 7.50%/Q)
    10/11/07     4,000     4,000   $ 1.00 (3)      
        Junior secured loan ($2,750 par due 10/13)   12.73%
(Libor + 7.50/M)
    11/1/07     2,750     2,750   $ 1.00        
        Junior secured loan ($6,000 par due 10/13)   12.73%
(Libor + 7.50/M)
    11/1/07     6,000     6,000   $ 1.00 (3)      
        Junior secured loan ($917 par due 10/13)   12.29%
(Libor + 7.50%/S)
    11/6/07     917     917   $ 1.00        
        Junior secured loan ($2,000 par due 10/13)   12.29%
(Libor + 7.50%/S)
    11/6/07     2,000     2,000   $ 1.00 (3)      

Waste Pro USA, Inc.

 

Waste management services

 

Senior subordinated loan ($25,000 par due 11/2013)

 

11.50%

 

 

11/9/06

 

 

25,000

 

 

25,000

 

$

1.00

(2)

 

 

 
        Preferred stock (15,000 shares)   10.00% PIK     11/9/06     15,000     15,000   $ 1,000.00 (4)      
        Warrants to purchase (882,671 shares)         11/9/06         4,000   $ 4.53 (5)      

Wastequip, Inc.(6)

 

Waste management equipment manufacturer

 

Senior subordinated loan ($12,602 par due 2/2015)

 

12.00%

 

 

2/5/07

 

 

12,731

 

 

10,211

 

$

0.81

 

 

 

 
        Common stock (13,889 shares)         2/2/07     1,389     694   $ 50.00 (5)      
                                         
                        85,294     86,194           7.65 %
                                         
Manufacturing                                    
Arrow Group Industries, Inc.   Residential and outdoor shed manufacturer   Senior secured loan ($5,616 par due 4/2010)   10.20%
(Libor + 5.00%/Q)
    3/28/05     5,649     5,616   $ 1.00 (3)      

Emerald Performance Materials, LLC

 

Polymers and performance materials manufacturer

 

Senior secured loan ($10,164 par due 5/2011)

 

9.00%
(Base Rate + 1.75%/D)

 

 

5/16/06

 

 

10,164

 

 

10,164

 

$

1.00

(3)

 

 

 
        Senior secured loan ($1,523 par due 5/2011)   10.75%
(Base Rate + 3.50%/D)
    5/16/06     1,523     1,523   $ 1.00 (3)      
        Senior secured loan ($4,411 par due 5/2011)   13.00%     5/16/06     4,422     4,422   $ 1.00        

Qualitor, Inc.

 

Automotive aftermarket components supplier

 

Senior secured loan ($1,775 par due 12/2011)

 

9.08%
(Libor + 4.25%/Q)

 

 

12/29/04

 

 

1,775

 

 

1,775

 

$

1.00

(3)

 

 

 
        Junior secured loan ($5,000 par due 6/2012)   12.08%
(Libor + 7.25%/Q)
    12/29/04     5,000     5,000   $ 1.00 (3)      

Reflexite Corporation(7)

 

Developer and manufacturer of high-visibility reflective products

 

Common Stock (1,821,860 shares)

 

 

 

 

3/28/06

 

 

27,435

 

 

54,666

 

$

30.01

(5)

 

 

 

Saw Mill PCG Partners LLC

 

Precision components manufacturer

 

Common units (1,000 units)

 

 

 

 

2/2/07

 

 

1,000

 

 

400

 

$

400.00

(5)

 

 

 

Universal Trailer Corporation(6)

 

Livestock and specialty trailer manufacturer

 

Common stock (50,000 shares)

 

 

 

 

10/8/04

 

 

6,425

 

 

485

 

$

9.69

(5)

 

 

 

F-29


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Warrants to purchase 22,208 shares         10/8/04     1,506     215   $ 9.69 (5)      
                                         
                        64,899     84,266           7.48 %
                                         
Restaurants                                    
ADF Capital, Inc. & ADF Restaurant Group, LLC   Restaurant owner and operator   Senior secured revolving loan ($2,000 par due 11/2013)   8.88%
(Libor + 3.50%/Q)
    11/27/06     2,000     2,000   $ 1.00        
        Senior secured revolving loan ($2,237 par due 11/2013)   9.75%
(Base Rate + 2.50%/D)
    11/27/06     2,237     2,237   $ 1.00        
        Senior secured loan ($19,606 par due 11/2012)   13.88%
(Libor + 8.50%/Q)
    11/27/06     19,606     19,606   $ 1.00        
        Senior secured loan ($990 par due 11/2012)   13.88%
(Libor + 8.50%/Q)
    11/27/06     990     990   $ 1.00 (2)      
        Senior secured loan ($14,054 par due 11/2012)   13.88%
(Libor + 8.50%/Q)
    11/27/06     14,054     14,054   $ 1.00 (3)      
        Promissory note ($10,713 par due 11/2016)   10.00% PIK     6/1/06     10,713     10,725   $ 1.00 (4)      
        Warrants to purchase (.61 shares)         6/1/06           $ (5)      

Encanto Restaurants, Inc.(8)

 

Restaurant owner and operator

 

Junior secured loan ($24,352 par due 8/2013)

 

7.50% Cash,
3.50% PIK

 

 

8/16/06

 

 

24,352

 

 

24,352

 

$

1.00

(4)

 

 

 
        Junior secured loan ($1,015 par due 8/2013)   7.50% Cash,
3.50% PIK
    8/16/06     1,015     1,015   $ 1.00 (3)(4)      
                                         
                        74,967     74,979           6.66 %
                                         

Containers—Packaging

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Captive Plastics, Inc.   Plastics container manufacturer   Junior secured loan ($3,500 par due 2/2012)   12.34%
(Libor + 7.25%/Q)
    12/19/05     3,500     3,500   $ 1.00        
        Junior secured loan ($12,000 par due 2/2012)   12.34%
(Libor + 7.25%/Q)
    12/19/05     12,000     12,000   $ 1.00 (3)      

Industrial Container Services, LLC(6)

 

Industrial container manufacturer, reconditioner and servicer

 

Senior secured revolving loan ($1,859 par due 9/2011)

 

10.25%
(Base Rate + 3.00%/D)

 

 

6/21/06

 

 

1,859

 

 

1,859

 

$

1.00

 

 

 

 
        Senior secured revolving loan ($4,130 par due 9/2011)   8.93%
(Libor + 4.00%/M)
    6/21/06     4,130     4,130   $ 1.00        
        Senior secured loan ($5,897 par due 9/2011)   8.93%
(Libor + 4.00%/M)
    9/30/05     5,897     5,897   $ 1.00        
        Senior secured loan ($990 par due 9/2011)   8.93%
(Libor + 4.00%/M)
    6/21/06     990     990   $ 1.00 (2)      
        Senior secured loan ($15,161 par due 9/2011)   8.93%
(Libor + 4.00%/M)
    6/21/06     15,161     15,161   $ 1.00 (3)      
        Common stock (1,800,000 shares)         9/29/05     1,800     5,000   $ 2.78 (5)      
                                         
                        45,337     48,537           4.31 %
                                         

F-30


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
Aerospace & Defense                                    
AP Global Holdings, Inc.   Safety and security equipment manufacturer   Senior secured loan ($20,000 par due 10/2013)   9.73%
(Libor + 4.50%/M)
    11/8/07     19,607     20,000   $ 1.00        

ILC Industries, Inc.

 

Industrial products provider

 

Junior secured loan ($12,000 par due 8/2012)

 

11.50%

 

 

6/27/06

 

 

12,000

 

 

12,000

 

$

1.00

(3)

 

 

 

Thermal Solutions LLC and TSI Group, Inc.

 

Thermal management and electronics packaging manufacturer

 

Senior secured loan ($2,797 par due 3/2012)

 

10.50%
(Base Rate + 3.25%/D)

 

 

3/28/05

 

 

2,797

 

 

2,752

 

$

0.98

(3)

 

 

 
        Senior secured loan ($1,182 par due 3/2011)   10.00%
(Base Rate + 2.75%/D)
    3/28/05     1,182     1,164   $ 0.98 (3)      
        Senior subordinated notes ($2,049 par due 9/2012)   11.50% cash,
2.75% PIK
    3/28/05     2,068     2,017   $ 0.98 (4)      
        Senior subordinated notes ($3,235 par due 9/2012)   11.50% cash,
2.75% PIK
    3/28/05     3,237     3,185   $ 0.98 (2)(4)      
        Senior subordinated notes ($2,613 par due 3/2013)   11.50% cash,
2.50% PIK
    3/21/06     2,613     2,517   $ 0.96 (2)(4)      
        Preferred stock (71,552 shares)         3/28/05     716     693   $ 9.69 (5)      
        Common stock (1,460,246 shares)         3/28/05     15     14   $ 0.01 (5)      
                                         
                        44,235     44,342           3.94 %
                                         
Computers and Electronics                                    
RedPrairie Corporation   Software manufacturer   Junior secured loan ($6,500 par due 1/2013)   11.39%
(Libor + 6.50%/Q)
    7/13/06     6,500     6,500   $ 1.00        
        Junior secured loan ($12,000 par due 1/2013)   11.39%
(Libor + 6.50%/Q)
    7/13/06     12,000     12,000   $ 1.00 (3)      

X-rite, Incorporated

 

Artwork software manufacturer

 

Junior secured loan ($4,800 par due 7/2013)

 

12.38%
(Libor + 7.50%/Q)

 

 

7/6/06

 

 

4,800

 

 

4,800

 

$

1.00

 

 

 

 
        Junior secured loan ($12,000 par due 7/2013)   12.38%
(Libor + 7.50%/Q)
    7/6/06     12,000     12,000   $ 1.00 (3)      
                                         
                        35,300     35,300           3.13 %
                                         

Health Clubs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Athletic Club Holdings, Inc.(13)   Premier health club operator   Senior secured loan ($29,424 par due 10/2013)   9.63%
(Libor + 4.50%/Q)
    10/11/07     29,424     29,424   $ 1.00        
        Senior secured loan ($4,488 par due 10/2013)   9.63%
(Libor + 4.50%/Q)
    10/11/07     4,488     4,488   $ 1.00 (3)      
        Senior secured loan ($50 par due 10/2013)   9.47%
(Libor + 4.50%/Q)
    10/11/07     50     50   $ 1.00        
        Senior secured loan ($8 par due 10/2013)   9.47%
(Libor + 4.50%/Q)
    10/11/07     8     8   $ 1.00 (3)      
        Senior secured loan ($26 par due 10/2013)   10.75%
(Libor + 3.50%/Q)
    10/11/07     26     26   $ 1.00        
        Senior secured loan ($4 par due 10/2013)   10.75%
(Libor + 3.50%/Q)
    10/11/07     4     4   $ 1.00 (3)      
                                         
                        34,000     34,000           3.02 %
                                         

F-31


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
Grocery                                    
Planet Organic Health Corp.(8)   Organic grocery store operator   Senior secured loan ($7,000 par due 7/2014)   10.45%
(Libor + 5.50%/Q)
    7/3/07     7,000     7,000   $ 1.00        
        Senior secured loan ($10,500 par due 7/2014)   10.45%
(Libor + 5.50%/Q)
    7/3/07     10,500     10,500   $ 1.00 (3)      
        Senior subordinated loan ($9,332 par due 7/2012)   11.00% Cash,
2.00% PIK
    7/3/07     9,332     9,332   $ 1.00 (4)      
                                         
                        26,832     26,832           2.38 %
                                         
Cargo Transport                                    
The Kenan Advantage Group, Inc.   Fuel transportation provider   Senior subordinated notes ($9,524 par due 12/2013)   9.50% cash,
3.50% PIK
    12/15/05     9,524     9,524   $ 1.00 (2)(4)      
        Senior secured loan ($2,450 par due 12/2011)   7.58%
(Libor + 2.75%/Q)
    12/15/05     2,450     2,205   $ 0.90 (3)      
        Preferred stock (10,984 shares)         12/15/05     1,098     1,293   $ 117.72 (5)      
        Common stock (30,575 shares)         12/15/05     31     36   $ 1.18 (5)      
                                         
                        13,103     13,058           1.16 %
                                         
Consumer Products—Durable                                    
Direct Buy Holdings, Inc. and Direct Buy Investors LP(6)   Membership-based buying club franchisor and operator from the manufacturer   Senior secured loan ($2,500 par due 11/2012)   9.74%
(Libor + 4.50%/M)
    12/14/07     2,400     2,400   $ 0.96        
        Partnership interests (19.31% interest)         11/30/07     10,000     10,000   $ 100.00 (5)      
                                         
                        12,400     12,400           1.10 %
                                         
Housing—Building Materials                                    
HB&G Building Products   Synthetic and wood product manufacturer   Senior subordinated loan ($8,838 par due 3/2011)   13.00% cash,
3.00% PIK
    10/8/04     8,826     8,839   $ 1.00 (2)(4)      
        Common stock (2,743 shares)         10/8/04     753     377   $ 137.24 (5)      
        Warrants to purchase 4,464 shares         10/8/04     653     326   $ 73.09 (5)      
                                         
                        10,232     9,542           0.85 %
                                         
Telecommunications                                    
American Broadband Communications, LLC and American Broadband Holding Company   Broadband communication services   Senior subordinated loan ($9,327 par due 11/2014)   8.00% cash,
8.00% PIK
    11/7/07     9,327     9,327   $ 1.00 (4)      
        Warrants to purchase 170 shares         11/7/07           $ (5)      
                                         
                        9,327     9,327           0.83 %
                                         
Total                     $ 1,795,621   $ 1,774,202              
                                         

(1)
Other than our investments in Equinox EIC Partners, LLC, Ivy Hill Middle Market Credit Fund, Ltd., LVCG Holdings LLC, Reflexite Corporation and The Thymes, LLC, we do not "Control" any of our portfolio companies, as defined in the Investment Company Act. In general, under the Investment Company Act, we would "Control" a portfolio company if we owned more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. All of our portfolio company investments are subject to legal restriction on sales which as of December 31, 2007 represented 158% of the Company's net assets.

(2)
Pledged as collateral for the CP Funding Facility and unless otherwise noted, all other investments are pledged as collateral for the Revolving Credit Facility (see Note 8 to the consolidated financial statements).

(3)
Pledged as collateral for the ARCC CLO and unless otherwise noted, all other investments are pledged as collateral for the Revolving Credit Facility (see Note 8 to the consolidated financial statements).

F-32


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

(5)
Non-income producing at December 31, 2007.

(6)
As defined in the Investment Company Act, we are an "Affiliate" of this portfolio company because we own 5% or more of the portfolio company's outstanding voting securities. Transactions during the period for the year ended December 31, 2007 in which the issuer was an Affiliate (but not a portfolio company that we "Control") are as follows:

 
Company
  Purchases   Redemptions
(cost)
  Sales
(cost)
  Interest
income
  Capital
structuring
service
fees
  Dividend
income
  Other
income
  Net
realized
gains/losses
  Net
unrealized
gains/losses
 
 

Abingdon Investments Limited

  $   $   $   $   $   $ 1,224   $   $   $ (1,288 )
 

Apple & Eve, LLC and US Juice Partners, LLC

  $ 74,846   $ 115   $ 21,000   $ 1,648   $ 1,353   $   $ 13   $   $  
 

CT Technologies Intermediate Holdings, Inc. and CT Technologies Holdings, LLC

  $ 135,930   $   $ 72,500   $ 3,571   $ 2,598   $   $ 149   $   $  
 

Daily Candy, Inc.

  $   $ 2,569   $ 10,000     3,068   $   $   $   $   $ 2,654  
 

Direct Buy Holdings, Inc. and Direct Buy Investors LP

  $ 12,400   $   $   $ 12   $   $   $   $   $  
 

Firstlight Financial Corporation

  $ 40,000   $   $   $ 4,944   $ 38   $   $ 750   $   $ (10,000 )
 

Imperial Capital Group, LLC

  $ 15,000   $   $   $   $ 300   $ 201   $   $   $  
 

Industrial Container Services, LLC

  $ 9,665   $ 9,476   $ 16,000   $ 3,171   $   $   $ 154   $   $ 3,200  
 

Investor Group Services, LLC

  $ 400   $ 1,400   $   $ 301   $   $   $ 38   $   $  
 

Pillar Holdings LLC and PHL Holding Co.

  $ 59,500   $   $   $ 678   $ 1,056   $   $ 15   $   $  
 

Primis Marketing Group, Inc. and Primis Holdings, LLC

  $   $   $   $ 861   $   $   $   $   $ (5,636 )
 

Making Memories Wholesale, Inc.

  $   $ 633   $   $ 1,999   $   $   $   $   $ (4,983 )
 

Universal Trailer Corporation

  $   $   $   $   $   $   $   $   $ (7,230 )
 

VSS-Tranzact Holdings, LLC

  $ 10,000   $   $   $   $   $   $   $   $  
 

Wastequip, Inc.

  $ 13,889   $ 27,000   $   $ 1,118   $   $   $   $   $ (3,215 )
 

Wear Me Apparel, LLC

  $ 32,500   $   $   $ 2,321   $ 325   $ 63   $ 25   $   $ (8,000 )
(7)
As defined in the Investment Company Act, we are an "Affiliate" of this portfolio company because we own 5% or more of the portfolio company's outstanding voting securities or we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). In addition, as defined in the Investment Company Act, we "Control" this portfolio company because we own more than 25% of the portfolio company's outstanding voting securities or we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions during the period for the year ended December 31, 2007 in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:

 
Company
  Purchases   Redemptions
(cost)
  Sales
(cost)
  Interest
income
  Capital
structuring
service
fees
  Dividend
income
  Other
income
  Net
realized
gains/losses
  Net
unrealized
gains/losses
 
 

Equinox EIC Partners, LLC

  $ 94,239   $ 32,270   $ 22,500   $ 3,796   $ 2,734   $   $ 19   $ 3,488   $  
 

Ivy Hill Middle Market Credit Fund, Ltd.

  $ 56,000   $   $   $ 501   $   $   $ 45   $   $  
 

LVCG Holdings, LLC

  $ 6,600   $   $   $   $   $   $   $   $  
 

Reflexite Corporation

  $ 1,752   $ 10,682   $   $ 452   $   $ 121   $   $ 320   $ 27,231  
 

The Thymes, LLC

  $ 6,925   $   $ 75   $ 339   $ 165   $   $   $   $  
(8)
Non-U.S. company or principal place of business outside the U.S. and as a result is not a qualifying asset under Section 55(a) of the Investment Company Act. Under the Investment Company Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.

(9)
Non-registered investment company.

(10)
A majority of the variable rate loans to our portfolio companies bear interest at a rate that may be determined by reference to either Libor or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower's option, which reset semi-annually (S), quarterly (Q), bi-monthly (B) monthly (M) or daily (D). For each such loan, we have provided the current interest rate in effect at December 31, 2007.

(11)
In addition to the interest earned based on the stated interest rate of this security, we are entitled to receive an additional interest amount of 2.50% on $23.3 million aggregate principal amount of the portfolio company's senior term debt previously syndicated by us.

(12)
Principal amount denominated in Canadian dollars has been translated into U.S. dollars (see Note 2).

(13)
In addition to the interest earned based on the stated interest rate of this security, we are entitled to receive an additional interest amount of 2.50% on $25.0 million aggregate principal amount of the portfolio company's senior term debt previously syndicated by us.

(14)
Loan was on non-accrual status as of December 31, 2007.

See accompanying notes to consolidated financial statements.

F-33



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(dollar amounts in thousands, except per share data)

 
  Common Stock    
  Accumulated
Undistributed
Net Investment
Income
  Accumulated
Net Realized
Gain on Sale
of Investments
  Net Unrealized
(Depreciation)
Appreciation
of Investments
   
 
 
  Capital in
Excess of
Par Value
  Total
Stockholders'
Equity
 
 
  Shares   Amount  

Balance at December 31, 2005

    37,909,484   $ 38   $ 559,193   $   $ 5,765   $ 4,617   $ 569,613  
                               
 

Issuance of common stock from add-on offerings (net of offering and underwriting costs)

    13,511,250     14     211,739                 211,753  
 

Shares issued in connection with dividend reinvestment plan

    615,793         10,702                 10,702  
 

Net increase in stockholders' equity resulting from operations

                56,632     27,616     (14,553 )   69,695  
 

Dividend declared ($1.64 per share)

                (56,632 )   (15,697 )       (72,329 )
 

Tax reclassification of stockholders' equity in accordance with generally accepted accounting principles

            3,559     7,038     (10,597 )        
                               

Balance at December 31, 2006

    52,036,527   $ 52   $ 785,193   $ 7,038   $ 7,087   $ (9,936 ) $ 789,434  
                               
 

Issuance of common stock from add-on offerings (net of offering and underwriting costs)

    19,961,578     20     344,146                 344,166  
 

Shares issued in connection with dividend reinvestment plan

    685,985     1     11,613                 11,614  
 

Net increase in stockholders' equity resulting from operations

                94,949     6,544     (10,661 )   90,832  
 

Dividend declared ($1.66 per share)

                (97,864 )   (13,631 )       (111,495 )
 

Tax reclassification of stockholders' equity in accordance with generally accepted accounting principles

            (4,353 )   2,882     1,471          
                               

Balance at December 31, 2007

    72,684,090   $ 73   $ 1,136,599   $ 7,005   $ 1,471   $ (20,597 ) $ 1,124,551  
                               
 

Issuance of common stock from transferable rights offering (net of offering and dealer manager costs)

    24,228,030     24     259,777                 259,801  
 

Shares issued in connection with dividend reinvestment plan

    240,700         2,922                 2,922  
 

Net decrease in stockholders' equity resulting from operations

                126,992     6,371     (272,818 )   (139,455 )
 

Dividend declared ($1.68 per share)

                (145,098 )   (7,842 )       (152,940 )
 

Tax reclassification of stockholders' equity in accordance with generally accepted accounting principles

            (3,340 )   3,464     (124 )        
                               

Balance at December 31, 2008

    97,152,820   $ 97   $ 1,395,958   $ (7,637 )   (124 ) $ (293,415 ) $ 1,094,879  
                               

See accompanying notes to consolidated financial statements.

F-34



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(dollar amounts in thousands)

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

OPERATING ACTIVITIES:

                   
 

Net (decrease) increase in stockholders' equity resulting from operations

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

Adjustments to reconcile net (decrease) increase in stockholders' equity resulting from operations to net cash used by operating activities:

                   
 

Net realized gains from investment and foreign currency transactions

    (6,557 )   (6,544 )   (27,616 )
 

Net unrealized (losses) from investment and foreign currency transactions

    272,818     10,661     14,553  
 

Net accretion of discount on securities

    (1,307 )   (1,266 )   (673 )
 

Increase in accrued payment-in-kind dividends and interest

    (32,816 )   (16,231 )   (6,289 )
 

Amortization of debt issuance costs

    2,210     1,858     1,822  
 

Depreciation

    503     410     259  
 

Proceeds from sale and redemption of investments

    497,285     725,181     458,244  
 

Purchases of investments

    (925,945 )   (1,311,301 )   (1,033,016 )
 

Changes in operating assets and liabilities:

                   
   

Interest receivable

    6,183     (13,609 )   (4,293 )
   

Other assets

    (2,009 )   (917 )   (2,336 )
   

Management and incentive fees payable

    19,948     556     9,007  
   

Accounts payable and accrued expenses

    1,035     3,488     805  
   

Interest and facility fees payable

    (900 )   2,725     1,731  
   

Interest payable to the Investment Adviser

            (154 )
               
     

Net cash used by operating activities

    (309,007 )   (514,157 )   (518,261 )
               

FINANCING ACTIVITIES:

                   
 

Net proceeds from issuance of common stock

    259,801     344,166     211,753  
 

Borrowings on debt

    951,000     713,350     977,000  
 

Repayments on credit facility payable

    (721,200 )   (513,000 )   (513,000 )
 

Credit facility financing costs

    (3,139 )   (875 )   (5,574 )
 

Underwriting costs payable to the Investment Adviser

            (2,475 )
 

Dividends paid in cash

    (109,214 )   (99,882 )   (74,516 )
               
     

Net cash provided by financing activities

    377,248     443,759     593,188  
               

CHANGE IN CASH AND CASH EQUIVALENTS

    68,241     (70,398 )   74,927  

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

    21,142     91,540     16,613  
               

CASH AND CASH EQUIVALENTS, END OF PERIOD

  $ 89,383   $ 21,142   $ 91,540  
               

Supplemental Information:

                   
 

Interest paid during the period

  $ 34,421   $ 31,752   $ 14,358  
 

Taxes paid during the period

  $ 1,601   $ 1,272   $ 4,519  
 

Dividends declared during the period

  $ 152,940   $ 111,495   $ 72,329  

See accompanying notes to consolidated financial statements.

F-35



ARES CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2008

(dollar amounts in thousands, except per share data and as otherwise indicated)

1.     ORGANIZATION

              Ares Capital Corporation (the "Company" or "ARCC" or "we") is a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland. We have elected to be regulated as a business development company under the Investment Company Act of 1940 (the "Investment Company 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 elected to be treated as a regulated investment company, or a "RIC", under subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") and operates in a manner so as to qualify for the tax treatment applicable to RICs. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component like warrants, 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 international investment management firm. Ares Operations LLC ("Ares Administration" or the "administrator"), an affiliate of Ares Management, provides the administrative services necessary for us to operate (the "Administration Agreement").

2.     SIGNIFICANT ACCOUNTING POLICIES

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

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

              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.

              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

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are typically valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available (i.e., substantially all of our investments) are valued at fair value as determined in good faith by our board of directors, based on the input of our management and audit committee and independent valuation firms that have been engaged at the direction of the board to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing 12 month period and under a valuation policy and a consistently applied valuation process. The valuation process is conducted at the end of each fiscal quarter, with approximately 50% (based on value) of our valuations of portfolio companies without readily available market quotations subject to review by an independent valuation firm.

              As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company's debt and equity), the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison of the portfolio company's securities to publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation.

              Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors, based on the input of our management and audit committee and independent valuation firms under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which we have recorded it.

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

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

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

              Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Discounts and premiums on securities purchased are accreted/amortized over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums.

              Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management's judgment, are likely to remain current. The Company may make exceptions to this if the loan has sufficient collateral value and is in the process of collection. As of December 31, 2008, 4.4% of total investments at amortized cost (or 1.6% at fair value), were on non-accrual status. As of December 31, 2007, 1.2% of total investments at amortized cost or (0.9% at fair value), were placed on non-accrual status.

              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 years ended December 31, 2008, 2007 and 2006, $32,816, $16,231, and $6,289, respectively, in PIK income were recorded.

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

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

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

              Results of operations based on changes in foreign exchange rates are separately disclosed in the statement of operations. Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. government securities. These risks include, but are not limited to, currency fluctuation and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices more volatile than those of comparable U.S. companies or U.S. government securities.

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

              The Company's offering costs are charged against the proceeds from equity offerings when received. For the years ended December 31, 2008, 2007 and 2006, the Company incurred approximately $1,414, $900, and $900 in offering costs, respectively.

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

              The Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal income taxes.

              Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the year ended December 31, 2008, a net benefit of $100 was recorded for U.S. federal excise tax. For the years ended December 31, 2007 and 2006, provisions of approximately

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$100 and $570, respectively, were recorded for U.S. federal excise tax. As of December 31, 2008, $550 related to accrued excise tax was unpaid and included in accounts payable on the accompanying consolidated balance sheet.

              Certain of our wholly owned subsidiaries are subject to U.S. Federal and state income taxes. For the year ended December 31, 2008, we recorded a tax benefit of approximately $100 for these subsidiaries. For the year ended December 31, 2007, we recorded a tax benefit of approximately $900 for these subsidiaries. For the year ended December 31, 2006, we recorded a tax provision of $4,400 for these subsidiaries.

              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 investment.

              We have adopted a dividend reinvestment plan that provides for reinvestment of any distributions we declare in cash on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not opted out of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving the cash dividend. While we generally use primarily newly issued shares to implement the plan (especially if our shares are trading at a premium to net asset value), we may purchase shares in the open market in connection with our obligations under the plan. In particular, if our shares are trading at a significant enough discount to net asset value and we are otherwise permitted under applicable law to purchase such shares, we intend to purchase shares in the open market in connection with our obligations under our dividend reinvestment plan.

              The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of actual and contingent assets and liabilities at the date of the financial statements and the reported amounts of income or loss and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation of investments.

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

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3.     AGREEMENTS

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

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

              Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss. For example, if we receive pre-incentive fee net investment income in excess of the hurdle rate (as defined below) for a quarter, we will pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized and unrealized capital losses. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter, is compared to a fixed "hurdle rate" of 2.00% per quarter. If market interest rates rise, we may be able to invest our funds in debt instruments that provide for a higher return, which would increase our pre-incentive fee net investment income and make it easier for our investment adviser to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income. Our pre-incentive fee net investment income used to calculate this part of the incentive fee is also included in the amount of our total assets (other than cash and cash equivalents but including assets purchased with borrowed funds) used to calculate the 1.5% base management fee.

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

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

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

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

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

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

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

              For the year ended December 31, 2008, we incurred $30,463 in base management fees, $31,748 in incentive management fees related to pre-incentive fee net investment income and no incentive management fees related to realized capital gains. As of December 31, 2008, $32,989 was unpaid and included in "management and incentive fees payable" in the accompanying consolidated balance sheet. Payment of $25,255 in incentive management fees for the year ended December 31, 2008 will be deferred pursuant to the investment advisory and management agreement.

              For the year ended December 31, 2007, we incurred $23,531 in base management fees, $23,522 in incentive management fees related to pre-incentive fee net investment income and no incentive management fees related to realized capital gains. As of December 31, 2007, $13,041 was unpaid and included in "management and incentive fees payable" in the accompanying consolidated balance sheet.

              For the year ended December 31, 2006, we incurred $13,646 in base management fees, $16,068 in incentive management fees related to pre-incentive fee net investment income and $3,448 in incentive management fees related to realized capital gains.

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              We are also party to a separate administration agreement, the "administration agreement," with our administrator, Ares Administration. Our board of directors approved the continuation of our administration agreement on May 29, 2008, which extended the term of the agreement until June 1, 2009. Pursuant to the administration agreement, Ares Administration furnishes us with office equipment and clerical, bookkeeping and record keeping services. Under the administration agreement, Ares Administration also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, Ares Administration assists us in determining and publishing our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. 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. Payments under the administration agreement are equal to an amount based upon our allocable portion of Ares Administration's overhead in performing its obligations under the administration agreement, including our allocable portion of the cost of our officers (including our chief compliance officer, chief financial officer, secretary and treasurer) and their respective staffs. The administration agreement may be terminated by either party without penalty upon 60-days' written notice to the other party.

              For the years ended December 31, 2008, 2007 and 2006, we incurred $2,701, $997, and $953 in administrative fees, respectively. As of December 31, 2008, $999 was unpaid and included in "accounts payable and accrued expenses" in the accompanying consolidated balance sheet.

4.     EARNINGS PER SHARE

              The following information sets forth the computations of basic and diluted net increase in stockholders' equity per share resulting from the years ended December 31, 2008, 2007 and 2006 (dollar amounts in thousands except share and per share data):

 
  2008   2007   2006  

Numerator for basic and diluted net (decrease) increase in stockholders' equity resulting from operations per share:

  $ (139,455 ) $ 90,832   $ 69,695  

Denominator for basic and diluted net (decrease) increase in stockholders' equity resulting from operations per share:

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

Basic and diluted net (decrease) increase in stockholders' equity resulting from operations per share:

  $ (1.56 ) $ 1.34   $ 1.58  

              In accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"), the weighted average shares of common stock outstanding used in computing basic and diluted net increase in stockholders' equity resulting from operations per share for the years ended December 31, 2008, 2007 and 2006 have been adjusted retroactively by a factor of 1.02% to recognize the bonus element associated with rights to acquire shares of common stock that we issued to stockholders of record as of March 24, 2008 in connection with a rights offering. See Note 13 for more information on the transferable rights offering.

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5.     INVESTMENTS

              Under the Investment Company Act, we are required to separately identify non-controlled investments where we own more than 5% of a portfolio company's outstanding voting securities as "affiliated companies." In addition, under the Investment Company Act, we are required to separately identify investments where we own more than 25% of a portfolio company's outstanding voting securities as "control affiliated companies." We had no existing control relationship with any of the portfolio companies identified as "affiliated companies" or "control affiliated companies" prior to making the indicated investment.

              For the year ended December 31, 2008, the Company funded $529.3 million aggregate principal amount of senior term debt, $336.3 million aggregate principal amount of senior subordinated debt and $60.4 million of investments in equity securities.

              In addition, for the year ended December 31, 2008, $345.8 million aggregate principal amount of senior term debt and $19.5 million of senior subordinated debt were redeemed. Additionally, $103.0 million aggregate principal amount of senior term debt, $9.5 million of senior subordinated debt and $7.4 million of investments in equity securities were sold.

              As of December 31, 2008, investments and cash and cash equivalents consisted of the following:

 
  Amortized Cost   Fair Value  

Cash and cash equivalents

  $ 89,383   $ 89,383  

Senior term debt

    1,165,460     1,055,089  

Senior subordinated debt

    737,072     619,491  

Equity securities

    309,061     247,997  

Collateralized debt obligations

    56,000     50,400  
           
 

Total

  $ 2,356,976   $ 2,062,360  
           

              As of December 31, 2007, investments and cash and cash equivalents consisted of the following:

 
  Amortized Cost   Fair Value  

Cash and cash equivalents

  $ 21,142   $ 21,142  

Senior term debt

    1,087,761     1,063,729  

Senior notes

    399,843     401,141  

Senior subordinated debt

    252,017     253,332  

Equity securities

    56,000     56,000  
           
 

Total

  $ 1,816,763   $ 1,795,344  
           

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

 
  As of
December 31,
 
 
  2008   2007  

Industry

             

Health Care

    20.2 %   17.1 %

Beverage/Food/Tobacco

    12.3     6.2  

Education

    11.1     6.9  

Other Services

    7.4     5.8  

Financial

    7.0     9.9  

Business Services

    6.7     8.5  

Retail

    5.7     6.5  

Environmental Services

    4.1     4.9  

Printing/Publishing/Media

    3.8     7.3  

Manufacturing

    3.8     4.7  

Restaurants

    3.6     4.2  

Aerospace and Defense

    3.0     2.5  

Consumer Products

    3.0     5.6  

Telecommunications

    2.0     0.5  

Cargo Transport

    1.4     0.8  

Containers/Packaging

    1.4     2.7  

Computers/Electronics

    1.2     2.0  

Health Clubs

    1.2     1.9  

Grocery

    1.0     1.5  

Homebuilding

    0.1     0.5  
           
 

Total

    100.0 %   100.0 %
           

 

 
  December 31,  
 
  2008   2007  

Geographic Region

             

Southeast

    22.2 %   18.3 %

Mid-Atlantic

    21.0     22.9  

Midwest

    20.6     22.6  

West

    18.3     19.0  

International

    14.1     12.7  

Northeast

    3.8     4.5  
           
 

Total

    100.0 %   100.0 %
           

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6.     INCOME TAXES

              The following reconciles net increase in stockholders' equity resulting from operations to taxable income for the year ended December 31, 2008:

Net increase in stockholders' equity resulting from operations

  $ (139,455 )

Net unrealized loss on investments transactions not taxable

    272,818  

Other income not currently taxable

    (1,008 )

Other taxable income

    1,351  

Expenses not currently deductible

    28,146  

Other deductible expenses

    (1,547 )
       

Taxable income before deductions for distributions

  $ 160,305  
       

              During the year ended December 31, 2008, as a result of permanent book-to-tax differences primarily due to the recharacterization of distributions, differences in the book and tax basis of investments sold, dividends paid by portfolio companies to the Company in excess of portfolio company earnings and nondeductible federal taxes, the Company increased accumulated undistributed net investment income by $3,464, decreased accumulated net realized gain (loss) on sale of investments by $124 and decreased capital in excess of par value by $3,340. Aggregate stockholders' equity was not affected by this reclassification. As of December 31, 2008, the cost of investments for tax purposes was $2,263,858 resulting in a gross unrealized appreciation and depreciation of $121,289 and $413,370, respectively.

              For income tax purposes, distributions paid to stockholders are reported as ordinary income, non-taxable, capital gains, or a combination thereof. Dividends paid per common share for the year ended December 31, 2008 were taxable as follows (unaudited):

Ordinary income

  $ 146,048  

Capital gains

    6,891  

Return of capital

     
       
 

Total

  $ 152,939  
       

              The following reconciles net increase in stockholders' equity resulting from operations to taxable income for the year ended December 31, 2007:

Net increase in stockholders' equity resulting from operations

  $ 90,832  

Net unrealized loss on investments transactions not taxable

    10,661  

Other income not currently taxable

    (1,429 )

Other taxable income

    1,221  

Expenses not currently deductible

    18  

Other deductible expenses

    (73 )
       

Taxable income before deductions for distributions

  $ 101,230  
       

              During the year ended December 31, 2007, as a result of permanent book-to-tax differences primarily due to the recharacterization of distributions, differences in the book and tax basis of investments sold, dividends paid by portfolio companies to the Company in excess of portfolio company earnings and nondeductible federal taxes, the Company increased accumulated undistributed net investment income by $2,882, increased accumulated net realized gain on sale of investments by $1,471 and decreased capital in excess of par value by $4,352. Aggregate stockholders' equity was not affected by this reclassification. As of December 31, 2007, the cost of investments for tax purposes was

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$1,795,464 resulting in a gross unrealized appreciation and depreciation of $55,305 and $76,567, respectively.

              For income tax purposes, distributions paid to stockholders are reported as ordinary income, non-taxable, capital gains, or a combination thereof. Dividends paid per common share for the year ended December 31, 2007 were taxable as follows (unaudited):

Ordinary income

  $ 106,600  

Capital gains

    4,895  

Return of capital

     
       
 

Total

  $ 111,495  
       

              The following reconciles net increase in stockholders' equity resulting from operations to taxable income for the year ended December 31, 2006:

Net increase in stockholders' equity resulting from operations

  $ 69,695  

Net unrealized gain on investments transactions not taxable

    14,553  

Other income not currently taxable

    (24,661 )

Other taxable income

    16,256  

Expenses not currently deductible

    5,705  

Other deductible expenses

    (1,107 )
       

Taxable income before deductions for distributions

  $ 80,441  
       

              Excluded from taxable income before deductions for distributions are $239 of capital losses realized by the Company after October 31, 2006, which were deferred for tax purposes to the first day of the following fiscal year. During the year ended December 31, 2006, as a result of permanent book-to-tax differences primarily due to the recharacterization of distributions, differences in the book and tax basis of investments sold, dividends paid by portfolio companies to the Company in excess of portfolio company earnings and nondeductible federal taxes, the Company increased accumulated undistributed net investment income by $7,038, decreased accumulated net realized gain on sale of investments by $10,598 and increased capital in excess of par value by $3,559. Aggregate stockholders' equity was not affected by this reclassification. As of December 31, 2006, the cost of investments for tax purposes was $1,245,893 resulting in a gross unrealized appreciation and depreciation of $2,483 and $12,554, respectively.

              For income tax purposes, distributions paid to stockholders are reported as ordinary income, non-taxable, capital gains, or a combination thereof. Dividends paid per common share for the year ended December 31, 2006 were taxable as follows (unaudited):

Ordinary income

  $ 64,551  

Capital gains

    7,778  

Return of capital

     
       
 

Total

  $ 72,329  
       

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7.     COMMITMENTS AND CONTINGENCIES

              As of December 31, 2008 and 2007, the Company had the following commitments to fund various revolving senior secured and subordinated loans:

 
  As of December 31,  
 
  2008   2007  

Total revolving commitments

  $ 419,000   $ 323,600  
 

Less: funded commitments

    (139,600 )   (79,200 )
           

Total unfunded commitments

    279,400     244,400  
 

Less: commitments substantially at discretion of the Company

    (32,400 )    
 

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

    (64,500 )   (15,400 )
           

Total net adjusted unfunded revolving commitments

  $ 182,500   $ 229,000  
           

              Of the total commitments as of December 31, 2008, $342,900 extend beyond the maturity date for our Revolving Credit Facility (as defined in Note 8). Included within the total commitments as of December 31, 2008 are commitments to issue up to $15,800 in standby letters of credit through a financial intermediary on behalf of certain portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. As of December 31, 2008, the Company had $12,500 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, $200 expire on January 31, 2009, $3,700 expire on February 28, 2009, $8,100 expire on September 30, 2009 and $500 expire on August 31, 2010. These letters of credit may be extended under substantially similar terms for additional one-year terms at the Company's option until the Revolving Credit Facility, under which the letters of credit were issued, matures on December 28, 2010.

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

 
  As of December 31,  
 
  2008   2007  

Total private equity commitments

  $ 428,300   $ 111,800  

Total unfunded private equity commitments

  $ 423,600   $ 110,500  

8.     BORROWINGS

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

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              Our debt obligations consisted of the following as of December 31, 2008 and 2007:

 
  As of December 31,  
 
  2008   2007  

Revolving Credit Facility

  $ 480,486   $ 282,528  

CP Funding Facility

    114,300     85,000  

Debt Securitization

    314,000     314,000  
           
 

Total

  $ 908,786   $ 681,528  
           

              The weighted average interest rate of all our debt obligations as of December 31, 2008 and December 31, 2007 was 3.03% and 5.66%, respectively.

              In October 2004, we formed Ares Capital CP Funding LLC ("Ares Capital CP"), a wholly owned subsidiary of the Company, through which we established a revolving facility, referred to as the "CP Funding Facility," that, as amended, allows Ares Capital CP to issue up to $350.0 million of variable funding certificates ("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. The CP Funding is also subject to a borrowing base that applies different advance rates to assets held in Ares Capital CP. Such limitations, requirements, and associated defined terms are as provided for in the documents governing the CP Funding Facility. As of December 31, 2008, there was $114,300 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, 2007, there was $85,000 outstanding under the CP Funding Facility.

              On July 22, 2008, we entered into an amendment to the CP Funding Facility to, among other things, extend its maturity, decrease the availability and advance rates applicable to certain types of eligible loans and make certain provisions of the facility more restrictive. The Company paid a renewal fee of 0.786% of the total amount available for borrowing, or $2,750. On December 5, 2008, we entered into an amendment to the CP Funding Facility to, among other things, modify the net worth test applicable to the Company, decrease the advance rates applicable to certain types of eligible loans and add an asset coverage requirement with respect to the Company consistent with applicable legal requirements.

              The CP Funding Facility is scheduled to expire on July 21, 2009. The CP Funding Facility is secured by all of the assets held by Ares Capital CP, which as of December 31, 2008 consisted of 45 investments.

              The interest charged on the VFC is based on the commercial paper rate, eurodollar or adjusted eurodollar rate plus 2.50%. Prior to July 22, 2008, the interest charged was based on the commercial paper rate plus 1.00%. The interest charged on the VFC is payable quarterly. As of December 31, 2008 and December 31, 2007, the commercial paper rate was 2.3271% and 5.1147%, respectively. For the years ended December 31, 2008, 2007 and 2006, the average interest rates (i.e. commercial paper rate plus the spread) were 5.19%, 6.12% and 5.80%, respectively. For the years

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ended December 31, 2008, 2007 and 2006, the average outstanding balances were $82,540, $88,296 and $45,621, respectively.

              For the years ended December 31, 2008, 2007 and 2006 the interest expense incurred was $4,280, $5,483, and $2,615, respectively. Cash paid for interest expense during the years ended December 31, 2008, 2007 and 2006 was $3,754, $4,285 and $2,603, respectively.

              The Company is also required to pay a commitment fee for any unused portion of the CP Funding Facility. The commitment fee is equal to 0.5% per annum for any unused portion of the CP Funding Facility. Prior to July 22, 2008, the commitment fee was 0.125% per annum calculated based on an amount equal to $200,000 less the borrowings outstanding under the CP Funding Facility. For the years ended December 31, 2008, 2007 and 2006, the commitment fees incurred were $625, $141 and $260, respectively.

              In December 2005, we entered into a senior secured revolving credit facility referred to as the "Revolving Credit Facility", under which, as amended, the lenders have agreed to extend credit to the Company in an aggregate principal amount not exceeding $510,000 at any one time outstanding (see Note 16). The Revolving Credit Facility expires on December 28, 2010 and with certain exceptions is secured by substantially all of the assets in our portfolio (other than investments held by Ares Capital CP under the CP Funding Facility and those held as a part of the Debt Securitization, discussed below), which as of December 31, 2008 consisted of 170 investments. 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 $765,000 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 December 31, 2008, there was $480,486 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, 2007, there was $282,500 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 December 31, 2008, the one, two, three and six month LIBOR were 0.44%,1.10%,1.43% and 1.75%, respectively. For the year ended December 31, 2008 the average interest rate was 4.17%, the average outstanding balance was $422,614, the interest expense incurred was $17,610 and the cash paid for interest expense was $18,787. As of December 31, 2007, the one, two, three and six month LIBOR were 4.60%,4.65%,4.70% and 4.60%, respectively. For the year ended December 31, 2007 the average interest rate was 6.50%, the average outstanding balance was $177,526, the interest expense incurred was $11,532 and the cash paid for interest expense was $9,918. For the year ended December 31, 2006, the average interest rate was 6.44%, the average outstanding balance was $89,022, the interest expense incurred was $5,732 and the cash paid for interest expense

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was $4,519. The Company is also required to pay a commitment fee of 0.20% for any unused portion of the Revolving Credit Facility. For the years ended December 31, 2008, 2007 and 2006, the commitment fees incurred were $224, $304 and $318, respectively.

              The amount available for borrowing under the Revolving Credit Facility is reduced by any standby letters of credit issued through the Revolving Credit Facility. As of December 31, 2008, the Company had $16,700 in standby letters of credit issued through the Revolving Credit Facility. As of December 31, 2007, the Company had $11,400 in standby letters of credit issued through the Revolving Credit Facility.

              As of December 31, 2008, the Company had a non-U.S. borrowing on the Revolving Credit Facility denominated in Canadian dollars. As of December 31, 2008 and 2007, unrealized appreciation on this borrowing was $3,365 and $822, respectively.

              In July 2006, through our wholly owned subsidiary, ARCC CLO 2006 LLC ("ARCC CLO"), we completed a $400,000 debt securitization (the "Debt Securitization") and issued approximately $314,000 principal amount of asset-backed notes (including $50,000 revolving notes, all of which were drawn down as of December 31, 2008) (the "CLO Notes") to third parties that were secured by a pool of middle market loans that have been purchased or originated by the Company. The CLO Notes are included in the December 31, 2008 consolidated balance sheet. We retained approximately $86,000 of aggregate principal amount of certain BBB and non-rated securities in the Debt Securitization (the "Retained Notes").

              The CLO Notes mature on December 20, 2019, and, as of December 31, 2008, there is $314,000 outstanding under the Debt Securitization (excluding the Retained Notes). 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 as follows:

Class
  Amount
(millions)
  Rating
(S&P/Moody's)
  LIBOR Spread
(basis points)
 

A-1A

  $ 75   AAA/Aaa     25  

A-1A VFN(1)

    50   AAA/Aaa     28  

A-1B

    14   AAA/Aaa     37  

A-2A

    75   AAA/Aaa     22  

A-2B

    33   AAA/Aaa     35  

B

    23   AA/Aa2     43  

C

    44   A/A2     70  
                 
 

Total

  $ 314            
                 

(1)
Revolving class, all of which was drawn as of December 31, 2008.

              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, which were sold to the trust by the

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Company, the originator and servicer of the assets. As of December 31, 2008, there were 67 investments securing the notes. Additional commercial loans have been 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, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.

              The interest charged under the Debt Securitization is based on 3-month LIBOR which as of December 31, 2008 was 1.43% and as of December 31, 2007 was 4.70%. For the years ended December 31, 2008, 2007 and 2006, the effective average interest rates were 3.68%, 5.82% and 5.99%, respectively. For the years ended December 31, 2008, 2007 and 2006, we incurred $11,556, $17,528 and $7,714 of interest expense, respectively. For the years ended December 31, 2008, 2007 and 2006, the cash paid for interest was $11,881, $17,513 and $7,236, respectively. The Company is also required to pay a commitment fee of 0.175% for any unused portion of the Class A-1A VFN Notes. There were no commitment fees incurred for the year ended December 31, 2008. For the years ended December 31, 2007 and 2006, the commitment fee incurred was $23 and $42, respectively, on these notes.

9.     FAIR VALUE OF FINANCIAL INSTRUMENTS

              Effective January 1, 2008, the company adopted Statement of Financial Accounting Standards No. 159, the Fair Value Option for Financial Assets and Liabilities ("SFAS 159"), which provides companies the option to report selected financial assets and liabilities at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the company's choice to use fair value on its earnings. SFAS 159 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. With the exception of the line items entitled "other assets" and "debt," all assets and liabilities approximate fair value on the balance sheet. The carrying value of the line items entitled "interest receivable," "receivable for open trades," "payable for open trades," "accounts payable and accrued expenses," "management and incentive fees payable" and "interest and facility fees payable" approximate fair value due to their short maturity.

              Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"), which expands the application of fair value accounting. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure of fair value measurements. SFAS 157 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. SFAS 157 requires the Company to assume that the portfolio investment is sold in a principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with SFAS 157, the Company has considered its principal market as the market in which the Company exits its portfolio investments with the greatest volume and level of activity. SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with SFAS 157, these inputs are summarized in the three broad levels listed below:

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              In addition to using the above inputs in investment valuations, we continue to employ the valuation policy approved by our board of directors that is consistent with SFAS 157 (see Note 2). Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value. Our valuation policy considers the fact that because there is not a readily available market value for most of the investments in our portfolio, the fair value of the investments must typically be determined using unobservable inputs.

              Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which we have recorded it.

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

              The following table presents fair value measurements of cash and cash equivalents and investments as of December 31, 2008:

 
   
  Fair Value Measurements Using  
 
  Total   Level 1   Level 2   Level 3  

Cash and cash equivalents

  $ 89,383   $ 89,383   $   $  

Investments

  $ 1,972,977   $   $ 110,515   $ 1,862,462  

              The following tables present changes in investments that use Level 3 inputs for the year ended December 31, 2008:

 
  For the Year Ended
December 31, 2008
 

Balance as of December 31, 2007

  $ 1,738,021  

Net unrealized gains (losses)

    (264,171 )

Net purchases, sales or redemptions

    458,229  

Net transfers in and/or out of Level 3

    (69,617 )
       

Balance as of December 31, 2008

  $ 1,862,462  
       

              As of December 31, 2008, the net unrealized loss on the investments that use Level 3 inputs was $275,186.

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              Following are the carrying and fair values of our debt instruments as of December 31, 2008 and December 31, 2007. Fair value is estimated by discounting remaining payment using applicable current market rates which take into account changes in the Company's marketplace credit ratings.

 
  As of December 31, 2008   As of December 31, 2007  
 
  Carrying Value   Fair Value   Carrying Value   Fair Value  

Revolving Credit Facility

  $ 480,486   $ 462,000   $ 282,528   $ 279,000  

CP Funding Facility

    114,300     113,000     85,000     84,000  

Debt Securitization

    314,000     148,000     314,000     261,000  
                   

  $ 908,786   $ 723,000   $ 681,528   $ 624,000  
                   

10.   DERIVATIVE INSTRUMENTS

              In October 2008, we entered into a two-year interest rate swap agreement for a total notional amount of $75 million. Under the interest rate swap agreement, we will pay a fixed interest rate of 2.985% and receive a floating rate based on the prevailing three-month LIBOR. As of December 31, 2008, the 3-month LIBOR was 1.43%. For the year ended December 31, 2008, we recognized $(2,164) in unrealized depreciation related to this swap agreement. As of December 31, 2008, this swap agreement had a fair value of $(2,164), which is included in the "accounts payable and other liabilities" in the accompanying consolidated balance sheet.

11.   RELATED PARTY TRANSACTIONS

              In connection with the IPO, our investment adviser paid to underwriters, on our behalf, an additional sales load of $2,475. This amount accrued interest at a variable rate that adjusted quarterly equal to the three-month LIBOR plus 2.00% per annum. We repaid this amount in full, plus accrued and unpaid interest, in February 2006.

              In accordance with the investment advisory and management 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 years ended December 31, 2008, 2007 and 2006 the investment adviser incurred such expenses totaling $2,292, $1,985 and $853, respectively. As of December 31, 2008, $368 was unpaid and such payable is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.

              We rent office space (the "ARCC Office Space") directly from a third party pursuant to a lease that expires on February 27, 2011. In addition, we have entered into a sublease agreement with Ares Management whereby Ares Management subleases approximately 25% of the ARCC Office Space for a fixed rent equal to 25% of the basic annual rent payable by us under our lease, plus certain additional costs and expenses. For the years ended December 31, 2008, 2007 and 2006, such amounts payable to the Company totaled $253, $269 and $93, respectively.

              As of December 31, 2008, Ares Management, of which the investment adviser is a wholly owned subsidiary, owned 2,859,882 shares of the Company's common stock representing approximately 2.9% of the total shares outstanding as of December 31, 2008.

              See Notes 3, 12 and 13 for a description of other related party transactions.

12.   IVY HILL FUNDS

              On November 19, 2007, we established a middle market credit fund, Ivy Hill Middle Market Credit Fund, Ltd. ("Ivy Hill I"), which is managed by our wholly owned subsidiary, Ivy Hill Asset Management, L.P. ("Ivy Hill Management"), in exchange for a 0.50% management fee on the average

F-54



total assets of Ivy Hill I. As of December 31, 2008, the total assets of Ivy Hill I were approximately $370,800. For the years ended December 31, 2008 and 2007, the Company earned $1,482 and $45 in management fees, respectively. Ivy Hill I primarily invests in first and second lien bank debt of middle-market companies. Ivy Hill I was initially funded with $404,000 of capital including a $56,000 investment by the Company consisting of $40,000 million of Class B notes and $16,000 of subordinated notes. For the years ended December 31, 2008 and 2007, the Company earned $5,427 and $500 from its investments in Ivy Hill I, respectively.

              Ivy Hill I purchased $68,000 and $133,000 of investments from the Company during the years ended December 31, 2008 and 2007, respectively, and may from time to time buy additional investments from the Company. There was no gain or loss recognized by the Company on these transactions.

              On November 5, 2008, we established a second middle market credit fund, Ivy Hill Middle Market Credit Fund II, Ltd. ("Ivy Hill II"), which is also managed by Ivy Hill Management, in exchange for a 0.50% management fee on the average total assets of Ivy Hill II. Ivy Hill II primarily invests in second lien and subordinated bank debt of middle-market companies. Ivy Hill II was initially funded with $250,000 of subordinated notes, and may grow over time with leverage. Ivy Hill II purchased $7,500 of investments from the Company during the year ended December 31, 2008. A loss of $188 was recorded on this transaction. For the year ended December 31, 2008, the Company earned $47 in management fees.

              Our indirect wholly owned subsidiary, Ivy Hill Management, is party to a separate services agreement, referred to herein as the "services agreement," with Ares Capital Management. Pursuant to the services agreement, Ares Capital Management provides Ivy Hill Management with office facilities, equipment, clerical, bookkeeping and record keeping services, services of investment professionals and others to perform investment advisory, research and related services, services of, and oversight of, custodians, depositories, accountants, attorneys, underwriters and such other persons in any other capacity deemed to be necessary. Ivy Hill Management will reimburse Ares Capital Management for all of the costs associated with such services, including Ares Capital Management's allocable portion of overhead and the cost of its officers and respective staff in performing its obligations under the services agreement. The services agreement may be terminated by either party without penalty upon 60-days' written notice to the other party. For the year ended December 31, 2008, Ivy Hill Management incurred such expenses payable to the Investment Adviser of $244.

13.   STOCKHOLDERS' EQUITY

              On April 28, 2008, we completed a transferable rights offering, issuing 24,228,030 shares at a subscription price of $11.0016 per share, less dealer manager fees of $0.22 per share. Net proceeds after deducting the dealer manager fees and estimated offering expenses were approximately $259,800. Ares Investments LLC, an affiliate of the investment adviser, purchased 1,643,215 shares in the rights offering, bringing its total shares owned to 2,859,882 shares of common stock, representing approximately 2.9% of the total shares outstanding as of December 31, 2008.

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

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

2008

                   

April 2008 public offering

    24.2   $ 11.00   $ 259.8  
                 
 

Total for the year ended December 31, 2008

    24.2         $ 259.8  

2007

                   

August 2007 public offering

    2.6   $ 16.30   $ 42.3  

April 2007 public offering

    15.5   $ 17.97     267.2  

February 2007 public offering

    1.4   $ 19.95     27.2  

Underwriters over-allotment option related to December 2006 public offering

    0.4   $ 18.50     7.5  
                 
 

Total for the year ended December 31, 2007

    19.9         $ 344.2  

2006

                   

December 2006 public offering

    2.7   $ 18.50   $ 49.8  

July 2006 public offering

    10.8   $ 15.67     162.0  
                 
 

Total for the year ended December 31, 2006

    13.5         $ 211.8  

14.   DIVIDEND

              The following table summarizes our dividends declared during 2008, 2007 and 2006 (in millions, except per share amount):

Date Declared
  Record Date   Payment Date   Per Share
Amount
  Total Amount  

November 6, 2008

  December 15, 2008   January 2, 2009   $ 0.42   $ 40.8  

August 7, 2008

  September 15, 2008   September 30, 2008   $ 0.42     40.8  

May 8, 2008

  June 16, 2008   June 30, 2008   $ 0.42     40.8  

February 28, 2008

  March 17, 2008   March 31, 2008   $ 0.42     30.5  
                   
 

Total declared for 2008

          $ 1.68   $ 152.9  
                   

November 8, 2007

  December 14, 2007   December 31, 2007   $ 0.42     30.5  

August 9, 2007

  September 14, 2007   September 28, 2007   $ 0.42     30.4  

May 10, 2007

  June 15, 2007   June 29, 2007   $ 0.41     28.5  

March 8, 2007

  March 19, 2007   March 30, 2007   $ 0.41     22.1  
                   
 

Total declared for 2007

          $ 1.66   $ 111.5  
                   

November 8, 2006

  December 15, 2006   December 29, 2006   $ 0.10   $ 5.2  

November 8, 2006

  December 15, 2006   December 29, 2006   $ 0.40     20.8  

August 9, 2006

  September 15, 2006   September 29, 2006   $ 0.40     19.6  

May 8, 2006

  June 15, 2006   June 30, 2006   $ 0.38     14.5  

February 28, 2006

  March 24, 2006   April 14, 2006   $ 0.36     13.7  
                   
 

Total declared for 2006

          $ 1.64   $ 73.8  
                   

              During the year ended December 31, 2008, as part of the Company's dividend reinvestment plan for our common stockholders, we purchased 1,404,852 shares of our common stock at an average

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price of $9.05 in the open market in order to satisfy the reinvestment portion of our dividends. During the year ended December 31, 2007, as part of the Company's dividend reinvestment plan for our common stockholders, we purchased 237,686 shares of our common stock at an average price of $15.00 in the open market in order to satisfy the reinvestment portion of our dividends.

15.   FINANCIAL HIGHLIGHTS

              The following is a schedule of financial highlights as of and for the years ended December 31, 2008, 2007 and 2006:

Per Share Data:
  As of and for
the year ended
December 31, 2008
  As of and for
the year ended
December 31, 2007
  As of and for
the year ended
December 31, 2006
 

Net asset value, beginning of period(1)

  $ 15.47   $ 15.17   $ 15.03  

Issuance of common stock

    (1.19 )   0.59     0.20  

Effect of antidilution (dilution)

    0.23         (0.03 )

Net investment income for period(2)

   
1.42
   
1.43
   
1.31
 

Net realized and unrealized gains (loss) for period(2)

    (2.98 )   (0.06 )   0.30  
               

Net (decrease) increase in stockholders' equity

    (1.56 )   1.37     1.61  

Distributions from net investment income

   
(1.58

)
 
(1.43

)
 
(1.31

)

Distributions from net realized capital gains on securities

    (0.10 )   (0.23 )   (0.33 )
               

Total distributions to stockholders

    (1.68 )   (1.66 )   (1.64 )
               

Net asset value at end of period(1)

  $ 11.27   $ 15.47   $ 15.17  
               

Per share market value at end of period

 
$

6.33
 
$

14.63
 
$

19.11
 

Total return based on market value(3)

    (45.25 )%   (14.76 )%   29.12 %

Total return based on net asset value(4)

    (11.17 )%   8.98 %   10.73 %

Shares outstanding at end of period

    97,152,820     72,684,090     52,036,527  

Ratio/Supplemental Data:

                   

Net assets at end of period

  $ 1,094,879   $ 1,124,550   $ 789,433  

Ratio of operating expenses to average net assets(5)(6)

    9.09 %   9.12 %   8.84 %

Ratio of net investment income to average net assets(5)(7)

    10.22 %   9.14 %   9.19 %

Portfolio turnover rate(5)

    24 %   30 %   49 %

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

(2)
Weighted average basic per share data.

(3)
For the year ended December 31, 2008, the total return based on market value for the year ended December 31, 2008 equals the increase of the ending market value at December 31, 2008 of $6.33 per share over the ending market value at December 31, 2007 of $14.63 per share plus the declared dividends of $1.68 per share for the year ended December 31, 2008, divided by the market value at December 31, 2007. For the year ended December 31, 2007, the total return based on market value for the year ended December 31, 2007 equals the increase of the ending market value at December 31, 2007 of $14.63 per share over the ending market value at December 31, 2006 of $19.11 per share plus the declared dividends of $1.66 per share for the year ended December 31, 2007, divided by the market value at December 31, 2006. For the year ended December 31, 2006, the total return based on market value for the year ended December 31, 2006 equals the increase of the ending market value at December 31, 2006 of $19.11 per share over the ending market value at December 31, 2005 of $16.07 per share plus the declared dividends of $1.64 per share for the year ended December 31, 2006, divided by the market value at December 31, 2005. Total return based on market value is not annualized.

(4)
For the year ended December 31, 2008, the total return based on net asset value equals the change in net asset value during the period plus the declared dividends of $1.68 per share for the year ended December 31,

F-57


(5)
The ratios reflect an annualized amount.

(6)
For the year ended December 31, 2008, the ratio of operating expenses to average net assets consisted of 2.45% of base management fees, 2.55% of incentive management fees, 2.93% of the cost of borrowing and other operating expenses of 1.16%. For the year ended December 31, 2007, the ratio of operating expenses to average net assets consisted of 2.27% of base management fees, 2.26% of incentive management fees, 3.55% of the cost of borrowing and other operating expenses of 1.04%. For the year ended December 31, 2006, the ratio of operating expenses to average net assets consisted of 2.06% of base management fees, 2.95% of incentive management fees, 2.81% of the cost of borrowing and other operating expenses of 1.02%. These ratios reflect annualized amounts.

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

16.   SUBSEQUENT EVENTS

              In January 2009, we increased the size of the Revolving Credit Facility under the "accordion" feature by an additional $15,000 bringing the total amount available for borrowing under the Revolving Credit Facility to $525,000.

              In February 2009, we repurchased, in an open market transaction, a total of $27,000 of our outstanding debt securities under the Debt Securitization for $6,550.

17.   SELECTED QUARTERLY DATA (Unaudited)

 
  2008  
 
  Q4   Q3   Q2   Q1  

Total investment income

  $ 62,723   $ 62,067   $ 63,464   $ 52,207  

Net investment income before net realized and unrealized gain (losses) and incentive compensation

  $ 40,173   $ 41,025   $ 45,076   $ 32,466  

Incentive compensation

  $ 8,035   $ 8,205   $ 9,015   $ 6,493  

Net investment income before net realized and unrealized gain (losses)

  $ 32,138   $ 32,820   $ 36,061   $ 25,973  

Net realized and unrealized gains (losses)

  $ (142,638 ) $ (74,213 ) $ (32,789 ) $ (16,807 )

Net (decrease) increase in stockholders' equity resulting from operations

  $ (110,500 ) $ (41,393 ) $ 3,272   $ 9,166  

Basic and diluted earnings per common share

  $ (1.14 ) $ (0.43 ) $ 0.04   $ 0.12  

Net asset value per share as of the end of the quarter

  $ 11.27   $ 12.83   $ 13.67   $ 15.17  

F-58


 

 
  2007  
 
  Q4   Q3   Q2   Q1  

Total investment income

  $ 53,828   $ 47,931   $ 47,399   $ 39,715  

Net investment income before net realized and unrealized gain (losses) and incentive compensation

  $ 33,677   $ 29,875   $ 31,220   $ 23,699  

Incentive compensation

  $ 6,573   $ 5,966   $ 6,229   $ 4,755  

Net investment income before net realized and unrealized gain (losses)

  $ 27,104   $ 23,909   $ 24,991   $ 18,944  

Net realized and unrealized gains (losses)

  $ (16,353 ) $ (984 ) $ 8,576   $ 4,645  

Net increase in stockholders' equity resulting from operations

  $ 10,752   $ 22,924   $ 33,567   $ 23,589  

Basic and diluted earnings per common share

  $ 0.15   $ 0.32   $ 0.48   $ 0.44  

Net asset value per share as of the end of the quarter

  $ 15.47   $ 15.74   $ 15.84   $ 15.34  

 

 
  2006  
 
  Q4   Q3   Q2   Q1  

Total investment income

  $ 37,508   $ 31,832   $ 30,490   $ 20,191  

Net investment income before net realized and unrealized gain (losses) and incentive compensation

  $ 23,508   $ 21,792   $ 16,233   $ 14,614  

Incentive compensation

  $ 5,189   $ 4,464   $ 6,940   $ 2,923  

Net investment income before net realized and unrealized gain (losses)

  $ 18,319   $ 17,328   $ 9,293   $ 11,692  

Net realized and unrealized gain (losses)

  $ 2,699   $ 813   $ 7,400   $ 2,151  

Net increase in stockholders' equity resulting from operations

  $ 21,018   $ 18,141   $ 16,693   $ 13,843  

Basic and diluted earnings per common share

  $ 0.42   $ 0.39   $ 0.44   $ 0.36  

Net asset value per share as of the end of the quarter

  $ 15.17   $ 15.06   $ 15.10   $ 15.03  

F-59



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(dollar amounts in thousands, except per share data)

 
  As of  
 
  September 30, 2009   December 31, 2008  
 
  (unaudited)
   
 

ASSETS

             
 

Investments at fair value (amortized cost of $2,245,137 and $2,267,593, respectively)

             
   

Non-controlled/non-affiliate company investments

  $ 1,506,376   $ 1,477,492  
   

Non-controlled affiliate company investments

    295,787     329,326  
   

Controlled affiliate company investments

    165,561     166,159  
           
   

Total investments at fair value

    1,967,724     1,972,977  
 

Cash and cash equivalents

    61,469     89,383  
 

Receivable for open trades

        3  
 

Interest receivable

    21,159     17,547  
 

Other assets

    14,729     11,423  
           
 

Total assets

  $ 2,065,081   $ 2,091,333  
           

LIABILITIES

             
 

Debt

  $ 767,871   $ 908,786  
 

Management and incentive fees payable

    56,527     32,989  
 

Payable for open trades

    489      
 

Accounts payable and accrued expenses

    14,750     10,006  
 

Interest and facility fees payable

    2,717     3,869  
 

Dividend payable

    136     40,804  
           
 

Total liabilities

    842,490     996,454  
 

Commitments and contingencies (Note 6)

             

STOCKHOLDERS' EQUITY

             
 

Common stock, par value $.001 per share, 200,000,000 common shares authorized, 109,592,728 and 97,152,820 common shares issued and outstanding, respectively

    110     97  
 

Capital in excess of par value

    1,505,031     1,395,958  
 

Accumulated undistributed net investment loss

    (2,436 )   (7,637 )
 

Accumulated net realized loss on investments, foreign currency transactions and extinguishment of debt

    (2,397 )   (124 )
 

Net unrealized loss on investments and foreign currency transactions

    (277,717 )   (293,415 )
           
 

Total stockholders' equity

    1,222,591     1,094,879  
           
 

Total liabilities and stockholders' equity

  $ 2,065,081   $ 2,091,333  
           

NET ASSETS PER SHARE

  $ 11.16   $ 11.27  
           

See accompanying notes to consolidated financial statements.

F-60



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(dollar amounts in thousands, except per share data)

 
  For the three months ended   For the nine months ended  
 
  September 30,
2009
  September 30,
2008
  September 30,
2009
  September 30,
2008
 
 
  (unaudited)
  (unaudited)
  (unaudited)
  (unaudited)
 

INVESTMENT INCOME:

                         
 

From non-controlled/non-affiliate company investments:

                         
 

Interest from investments

  $ 49,728   $ 45,425   $ 138,866   $ 118,112  
 

Capital structuring service fees

        3,029     1,653     14,175  
 

Interest from cash & cash equivalents

    35     325     245     1,314  
 

Dividend income

    525     375     1,568     1,246  
 

Management fees

    29         29      
 

Other income

    1,501     599     4,198     2,007  
                   
   

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

    51,818     49,753     146,559     136,854  
 

From non-controlled affiliate company investments:

                         
 

Interest from investments

    4,916     7,924     17,019     24,668  
 

Capital structuring service fees

        281         1,376  
 

Dividend income

    148     256     285     522  
 

Management fees

    63     188     1,380     564  
 

Other income

    140     136     308     379  
                   
   

Total investment income from non-controlled affiliate company investments

    5,267     8,785     18,992     27,509  
 

From controlled affiliate company investments:

                         
 

Interest from investments

    2,255     2,946     7,348     9,126  
 

Capital structuring service fees

            194     3,000  
 

Dividend income

    1,511     133     1,511     133  
 

Management fees

        437     1,286     1,068  
 

Other income

    30     13     118     48  
                   
   

Total investment income from controlled affiliate company investments

    3,796     3,529     10,457     13,375  
                   
 

Total investment income

    60,881     62,067     176,008     177,738  
                   

EXPENSES:

                         
 

Interest and credit facility fees

    5,721     9,535     18,603     26,613  
 

Base management fees

    7,508     7,963     22,502     22,729  
 

Incentive management fees

    8,227     8,205     23,764     23,713  
 

Professional fees

    2,044     1,499     5,749     4,370  
 

Professional fees related to the acquisition of Allied Capital Corporation

    1,989         1,989      
 

Insurance

    313     301     988     927  
 

Administrative

    809     802     2,905     1,702  
 

Depreciation

    167     134     505     338  
 

Directors fees

    134     57     370     197  
 

Other

    609     869     3,016     2,597  
                   
 

Total expenses

    27,521     29,365     80,391     83,186  

NET INVESTMENT INCOME BEFORE INCOME TAXES

    33,360     32,702     95,617     94,552  
                   

Income tax expense (benefit), including excise tax

    454     (118 )   563     (302 )
                   

NET INVESTMENT INCOME

    32,906     32,820     95,054     94,854  
                   

REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:

                         
 

Net realized gains (losses):

                         
 

Non-controlled/non-affiliate company investments

    12,049     2,018     9,887     2,235  
 

Non-controlled affiliate company investments

        2,600     (482 )   2,601  
 

Controlled affiliate company investments

    (13,705 )       (13,705 )    
 

Foreign currency transactions

        (38 )   68     (40 )
                   
   

Net realized gains (losses)

    (1,656 )   4,580     (4,232 )   4,796  
 

Net unrealized gains (losses):

                         
 

Non-controlled/non-affiliate company investments

    (552 )   (52,689 )   1,336     (81,283 )
 

Non-controlled affiliate company investments

    14,916     (21,354 )   3,644     (45,212 )
 

Controlled affiliate company investments

    17,699     (4,750 )   10,773     (2,117 )
 

Foreign currency transactions

    (37 )       (55 )   7  
                   
   

Net unrealized gains (losses)

    32,026     (78,793 )   15,698     (128,605 )
   

Net realized and unrealized gains (losses) from investments and foreign currency transactions

    30,370     (74,213 )   11,466     (123,809 )
                   

REALIZED GAIN ON EXTINGUISHMENT OF DEBT

            26,543      
                   

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

  $ 63,276   $ (41,393 ) $ 133,063   $ (28,955 )
                   

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

  $ 0.62   $ (0.43 ) $ 1.34   $ (0.33 )
                   

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING—BASIC AND DILUTED (see Note 4)

    102,831,909     97,152,820     99,066,652     87,152,501  
                   

See accompanying notes to consolidated financial statements.

F-61



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of September 30, 2009 (unaudited)

(dollar amounts in thousands, except per unit data)

Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 
Healthcare—Services                                        
American Renal Associates, Inc.   Dialysis provider   Senior secured loan ($1,082 par due 12/2010)   8.5%
(Libor + 6.00%/D)
    12/14/2005   $ 1,082   $ 1,082   $ 1.00 (3)(15)      
        Senior secured loan ($10,401 par due 12/2011)   8.5%
(Libor + 6.00%/Q)
    12/14/2005     10,401     10,401   $ 1.00 (3)(15)      

Capella Healthcare, Inc.
 
Acute care hospital operator
 
Junior secured loan ($55,000 par due 2/2016)
 
13.00%
   
2/29/2008
   
55,000
   
53,350
 
$

0.97
       
        Junior secured loan ($30,000 par due 2/2016)   13.00%     2/29/2008     30,000     29,100   $ 0.97 (2)      

CT Technologies
Intermediate Holdings, Inc. and CT Technologies Holdings, LLC(6)
 
Healthcare analysis services
 
Preferred stock (7,427 shares)
       
6/15/2007
   
7,427
   
7,055
 
$

950.00

(4)
     
        Common stock (9,679 shares)         6/15/2007     4,000     8,134   $ 840.38 (5)      
        Common stock (1,546 shares)         6/15/2007           $ (5)      

DSI Renal, Inc.
 
Dialysis provider
 
Senior secured revolving loan ($122 par due 3/2013)
 
5.30%
(Libor + 5.00%/M)
   
4/4/2006
   
122
   
103
 
$

0.85
       
        Senior secured revolving loan ($3,520 par due 3/2013)   5.30%
(Libor + 5.00%/M)
    4/4/2006     3,520     2,992   $ 0.85        
        Senior secured revolving loan ($1,120 par due 3/2013)   5.30%
(Libor + 5.00%/M)
    4/4/2006     1,120     952   $ 0.85        
        Senior secured revolving loan ($1,152 par due 3/2013)   5.30%
(Libor + 5.00%/M)
    4/4/2006     1,152     979   $ 0.85        
        Senior secured revolving loan ($1,600 par due 3/2013)   5.30%
(Libor + 5.00%/M)
    4/4/2006     1,600     1,360   $ 0.85        
        Senior secured revolving loan ($2 par due 3/2013)   5.30%
(Libor + 5.00%/M)
    4/4/2006     2     2   $ 0.85        
        Senior secured revolving loan ($18 par due 3/2013)   5.30%
(Libor + 5.00%/M)
    4/4/2006     18     15   $ 0.85        
        Senior secured revolving loan ($24 par due 3/2013)   5.30%
(Libor + 5.00%/M)
    4/4/2006     24     21   $ 0.85        
        Senior secured revolving loan ($54 par due 3/2013)   5.30%
(Libor + 5.00%/M)
    4/4/2006     54     46   $ 0.85        

F-62


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Senior secured revolving loan ($17 par due 3/2013)   5.30%
(Libor + 5.00%/M)
    4/4/2006     17     14   $ 0.85        
        Senior secured revolving loan ($20 par due 3/2013)   5.30%
(Libor + 5.00%/M)
    4/4/2006     20     17   $ 0.85        
        Senior secured revolving loan ($294 par due 3/2013)   5.30%
(Libor + 5.00%/M)
    4/4/2006     210     250   $ 0.85        
        Senior secured revolving loan ($44 par due 3/2013)   5.30%
(Libor + 5.00%/M)
    4/4/2006     31     37   $ 0.85        
        Senior secured loan ($17,025 par due 4/2014)   5.30%
(Libor + 5.00%/M)
    4/4/2006     12,161     14,472   $ 0.85        
        Senior subordinated note ($63,992 par due 4/2014)   16.00% PIK     4/4/2006     63,439     49,263   $ 0.77 (2)(4)      
        Senior subordinated note ($13,736 par due 4/2014)   16.00% PIK     4/4/2006     13,675     10,577   $ 0.77 (3)(4)      

GG Merger Sub I, Inc.
 
Drug testing services
 
Senior secured loan ($11,330 par due 12/2014)
 
4.30%
(Libor + 4.00%/Q)
   
12/14/2007
   
10,839
   
9,744
 
$

0.86
       
        Senior secured loan ($12,000 par due 12/2014)   4.30%
(Libor + 4.00%/Q)
    12/14/2007     11,481     10,320   $ 0.86        

HCP Acquisition Holdings, LLC(7)
 
Healthcare compliance advisory services
 
Class A units (10,062,095 units)
       
6/26/2008
   
10,062
   
7,194
 
$

0.72

(5)
     

Heartland Dental Care, Inc.
 
Dental services
 
Senior subordinated note ($32,717 par due 8/2013)
 
11.00% Cash,
3.25% PIK
   
7/31/2008
   
32,717
   
32,717
 
$

1.00

(4)
     

Magnacare Holdings, Inc., Magnacare Administrative Services, LLC, and Magnacare, LLC
 
Healthcare professional provider
 
Senior subordinated note ($4,623 par due 12/2012)
 
12.75% Cash,
2.00% PIK
   
2/9/2009
   
3,241
   
4,646
 
$

1.00

(4)
     

MPBP Holdings, Inc., Cohr Holdings, Inc. and MPBP Acquisition Co., Inc.
 
Healthcare equipment services
 
Senior secured loan ($997 par due 1/2014)
       
1/31/2007
   
512
   
489
 
$

0.49

(3)
     
        Junior secured loan ($20,000 par due 1/2014)   6.50%
(Libor + 6.25%/B)
    1/31/2007     20,000     5,000   $ 0.25        
        Junior secured loan ($12,000 par due 1/2014)   6.50%
(Libor + 6.25%/B)
    1/31/2007     12,000     3,000   $ 0.25 (3)      
        Common stock (50,000 shares)         1/31/2007     5,000         (5)      

MWD Acquisition Sub, Inc.
 
Dental services
 
Junior secured loan ($5,000 par due 5/2012)
 
6.49%
(Libor + 6.25%/M)
   
5/3/2007
   
5,000
   
4,350
 
$

0.87

(3)
     

OnCURE Medical Corp.
 
Radiation oncology care provider
 
Senior secured loan ($3,076 par due 8/2009)
 
3.75%
(Libor + 3.50%/M)
   
8/18/2006
   
3,076
   
2,707
 
$

0.88

(3)
     
        Senior subordinated note ($32,517 par due 8/2013)   11.00% Cash,
1.50% PIK
    8/18/2006     32,542     29,288   $ 0.90 (4)      

F-63


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Common stock (857,143 shares)         8/18/2006     3,000     3,000   $ 3.50 (5)      

Passport Health Communications, Inc, Passport Holding Corp. and Prism Holding Corp.
 
Healthcare technology provider
 
Senior secured loan ($12,725 par due 5/2014)
 
10.50%
(Libor + 7.50%/M)
   
5/9/2008
   
12,725
   
12,470
 
$

0.98

(15)
     
        Senior secured loan ($11,746 par due 5/2014)   10.50%
(Libor + 7.50%/M)
    5/9/2008     11,746     11,511   $ 0.98 (3)(15)      
        Series A preferred stock (1,594,457 shares)         7/30/2008     9,900     9,900   $ 6.21 (5)      
        Common stock (16,106 shares)         7/30/2008     100     100   $ 6.21 (5)      

PG Mergersub, Inc.
 
Provider of patient surveys, management reports and national databases for the integrated healthcare delivery system
 
Senior subordinated loan ($4,000 par due 3/2016)
 
12.50%
   
3/12/2008
   
3,935
   
3,920
 
$

0.98
       
        Preferred stock (333 shares)         3/12/2008     333     334   $ 1,003.00 (5)      
        Common stock (16,667 shares)         3/12/2008     167     167   $ 10.00 (5)      

The Schumacher Group of Delaware, Inc.
 
Outsourced physician service provider
 
Senior subordinated loan ($30,909 par due 7/2012)
 
11.13% Cash,
1.00% PIK
   
7/18/2008
   
30,909
   
30,909
 
$

1.00

(4)
     
        Senior subordinated loan ($5,229 par due 7/2012)   11.13% Cash,
1.00% PIK
    7/18/2008     5,229     5,229   $ 1.00 (4)      

Triad Laboratory Alliance, LLC
 
Laboratory services
 
Senior secured loan ($4,282 par due 12/2011)
 
8.50%
(Libor + 5.50%/Q)
   
12/21/2005
   
4,116
   
4,282
 
$

1.00

(3)(15)
     
        Senior subordinated note ($15,534 par due 12/2012)   12.00% Cash,
1.75% PIK
    12/21/2005     15,534     15,068   $ 0.97 (4)      

VOTC Acquisition Corp.
 
Radiation oncology care provider
 
Senior secured loan ($17,329 par due 7/2012)
 
11.00% Cash,
2.00% PIK
   
6/30/2008
   
17,329
   
17,329
 
$

1.00

(4)
     
        Series E preferred shares (3,888,222 shares)         7/14/2008     8,748     3,800   $ 0.98 (5)      
                                         
                        475,316     417,696           34.16 %
                                         

Education

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Campus Management Corp. and Campus Management Acquisition Corp.(6)
 
Education software developer
 
Senior secured loan ($3,280 par due 8/2013)
 
13.00 Cash,
3.00% PIK
   
2/8/2008
   
3,280
   
3,280
 
$

1.00

(16)(4)
     
        Senior secured loan ($30,494 par due 8/2013)   13.00 Cash,
3.00% PIK
    2/8/2008     30,494     30,494   $ 1.00 (2)(16)(4)      
        Senior secured loan ($9,028 par due 8/2013)   10.00% Cash,
3.00% PIK
    2/8/2008     9,028     9,028   $ 1.00 (16)(4)      
        Preferred stock (493,147 shares)   8.00% PIK     2/8/2008     8,952     12,800   $ 24.33 (4)      

F-64


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 

ELC Acquisition Corporation
 
Developer, manufacturer and retailer of educational products
 
Senior secured loan ($162 par due 11/2012)
 
3.50%
(Libor + 3.25%/M)
   
11/30/2006
   
162
   
154
 
$

0.95

(3)
     
        Junior secured loan ($8,333 par due 11/2013)   7.25%
(Libor + 7.00%/M)
    11/30/2006     8,333     7,917   $ 0.95 (3)      

Instituto de Banca y Comercio, Inc. Leeds IV Advisors, Inc.(8)
 
Private school operator
 
Senior secured revolving loan ($11,730 par due 3/2014)
 
6.50%
(Libor + 4.00%/Q)
   
3/15/2007
   
1,232
   
1,232
 
$

1.00

(3)(15)
     
        Senior secured loan ($11,730 par due 3/2014)   8.50%
(Libor + 6.00%/Q)
    3/15/2007     11,730     11,730   $ 1.00 (3)(15)      
        Senior subordinated loan ($30,644 par due 6/2014)   13.00% Cash,
3.00% PIK
    6/4/2008     30,644     30,644   $ 1.00 (4)      
        Preferred stock (165,811 shares)         6/4/2008     788     1,883   $ 11.35 (5)      
        Preferred stock (140,577 shares)         3/31/2009     668     1,596   $ 12.94 (5)      
        Common stock (214,286 shares)         6/4/2008     54     2,433   $ 11.35 (5)      
        Common stock (140,577 shares)         3/31/2009     35     1,596   $ 12.94 (5)      

Lakeland Finance, LLC
 
Private school operator
 
Senior secured note ($30,000 par due 12/2012)
 
11.50%
   
12/13/2005
   
30,000
   
30,000
 
$

1.00
       
        Senior secured note ($3,000 par due 12/2012)   11.50%     12/13/2005     3,000     3,000   $ 1.00 (2)      

R3 Education, Inc. (formerly known as Equinox EIC Partners, LLC and MUA Management Company)(6)(8)
 
Medical school operator
 
Senior secured revolving loan ($1,186 par due 12/2012)
 
6.25%
(Libor + 6.00%/M)
   
4/3/2007
   
1,186
   
1,162
 
$

0.98
       
        Senior secured loan ($14,113 par due 12/2012)   6.25%
(Libor + 6.00%/M)
    9/21/2007     14,113     13,830   $ 0.98 (2)      
        Senior secured loan ($7,300 par due 12/2012)   6.25%
(Libor + 6.00%/M)
    4/3/2007     7,275     7,130   $ 0.98 (3)      
        Common membership interest (26.27% interest)         9/21/2007     15,800     17,185       (5)      
        Preferred Stock (8,000 shares)               2,000     2,000   $ 250.00 (5)      
        Preferred stock (800 shares)               200     200   $ 250.00 (5)      
                                         
                        178,974     189,294           15.48 %
                                         

Beverage, Food and Tobacco

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3091779 Nova Scotia Inc.(8)
 
Baked goods manufacturer
 
Junior secured loan (Cdn $14,241 par due 11/2012)
 
10.00% Cash,
4.00% PIK
   
11/2/2007
   
15,047
   
11,278
 
$

0.85

(4)(12)
     
        Senior secured revolving loan (Cdn $7,338 par due 11/2012)   8.00%     11/2/2007     6,757     7,127   $ 1.00 (4)(12)      

F-65


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Warrants to purchase 57,545 shares                     $ (5)      

Apple & Eve, LLC and US Juice Partners, LLC(6)
 
Juice manufacturer
 
Senior secured loan ($24,216 par due 10/2013)
 
14.50%
(Libor + 11.50%/M)
   
10/5/2007
   
24,216
   
23,974
 
$

0.99

(15)
     
        Senior secured loan ($11,870 par due 10/2013)   14.50%
(Libor + 11.50%/M)
    10/5/2007     11,870     11,752   $ 0.99 (15)      
        Senior units (50,000 units)               5,000     3,500   $ 70.00        

Best Brands Corporation
 
Baked goods manufacturer
 
Senior secured loan ($13,135 par due 12/2012)
 
7.51%
(Libor + 7.25%M)
   
2/15/2008
   
10,966
   
13,135
 
$

1.00

(4)
     
        Senior secured loan ($8,759 par due 6/2013)   7.51%
(Libor + 7.25%M)
    12/14/2006     7,462     8,759   $ 1.00 (4)      
        Junior secured loan ($28,692 par due 6/2013)   12.00% Cash,
4.00% PIK
    12/14/2006     28,053     28,692   $ 1.00 (2)(4)      
        Junior secured loan ($8,611 par due 6/2013)   12.00% Cash,
4.00% PIK
    12/14/2006     8,611     8,611   $ 1.00 (3)(4)      
        Junior secured loan ($11,733 par due 6/2013)   12.00% Cash,
4.00% PIK
    12/14/2006     11,733     11,733   $ 1.00 (3)(4)      

Bumble Bee Foods, LLC and BB Co-Invest LP
 
Canned seafood manufacturer
 
Senior subordinated loan ($30,756 par due 11/2018)
 
16.25%
(12.00% Cash,
4.25% Optional PIK)
   
11/18/2008
   
30,756
   
30,756
 
$

1.00

(4)
     
        Common stock (4,000 shares)         11/18/2008     4,000     5,700   $ 1,425.00 (5)      

Charter Baking Company, Inc.
 
Baked goods manufacturer
 
Senior subordinated note ($5,874 par due 2/2013)
 
13.00% PIK
   
2/6/2008
   
5,874
   
5,874
 
$

1.00

(2)(4)
     
        Preferred stock (6,258 shares)         9/1/2006     2,500     1,725   $ 275.65 (5)      
                                         
                        172,845     172,616           14.12 %
                                         

Restaurants and Food Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ADF Capital, Inc. & ADF Restaurant Group, LLC
 
Restaurant owner and operator
 
Senior secured revolving loan ($1,408 par due 11/2013)
 
6.50%
(Libor + 3.5%/Q)
   
11/27/2006
   
1,408
   
1,408
 
$

1.00

(15)
     
        Senior secured revolving loan ($2,010 par due 11/2013)   6.50%
(Libor + 3.5%/S)
    11/27/2006     2,010     2,010   $ 1.00 (4)(15)      
        Senior secured loan ($23,615 par due 11/2012)   12.50%
(Libor + 6.50% Cash,
3.00% PIK/Q)
    11/27/2006     23,622     23,615   $ 1.00 (4)(15)      
        Senior secured loan ($11,069 par due 11/2012)   12.50%
(Libor + 6.50% Cash,
3.00% PIK/Q)
    11/27/2006     11,069     11,069   $ 1.00 (2)(4)(15)      
        Promissory note ($13,105 par due 11/2016)   12.00% PIK     6/1/2006     13,093     13,795   $ 1.05 (15)      
        Warrants to purchase 0.61 shares         6/1/2006         4,370   $ (5)      

Encanto Restaurants, Inc.(8)
 
Restaurant owner and operator
 
Junior secured loan ($21,368 par due 8/2013)
 
7.50% Cash,
3.50% PIK
   
8/16/2006
   
21,368
   
20,299
 
$

0.95

(2)(4)
   

F-66


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Junior secured loan ($4,070 par due 8/2013)   7.50% Cash,
3.50% PIK
    8/16/2006     4,070     3,867   $ 0.95 (3)(4)      

OTG Management, Inc.
 
Airport restaurant operator
 
Junior secured loan ($15,884 par due 6/2013)
 
20.50%
(Libor + 11.00% Cash,
6.50% PIK/M)
   
6/19/2008
   
15,884
   
15,884
 
$

1.05

(15)
     
        Warrants to purchase up to 88,991 shares of common stock                   750   $ 8.43 (5)      
        Warrants to purchase up to 9 shares of common stock                     $ (5)      

Vistar Corporation and Wellspring Distribution Corp.
 
Food service distributor
 
Senior subordinated loan ($43,625 par due 5/2015)
 
13.50%
   
5/23/2008
   
43,625
   
41,444
 
$

0.95
       
        Senior subordinated loan ($25,000 par due 5/2015)   13.50%     5/23/2008     25,000     23,750   $ 0.95 (2)      
        Senior subordinated loan ($5,000 par due 5/2015)   13.50%     5/23/2008     5,000     4,750   $ 0.95 (2)      
        Class A non-voting common stock (1,366,120 shares)         5/23/2008     7,500     3,253   $ 2.38 (5)      
                                         
                        173,649     170,264           13.93 %
                                         

Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carador PLC(6)(8)(9)
 
Investment company
 
Ordinary shares (7,110,525 shares)
       
12/15/2006
   
9,033
   
2,311
 
$

0.38

(5)
     

CIC Flex, LP(9)
 
Investment partnership
 
Limited partnership units (0.69 unit)
       
9/7/2007
   
41
   
41
 
$

59,420.29

(5)
     

Covestia Capital Partners, LP(9)
 
Investment partnership
 
Limited partnership interest (47% interest)
       
6/17/2008
   
1,059
   
1,059
   
(5)
     

Firstlight Financial Corporation(6)(9)
 
Investment company
 
Senior subordinated loan ($72,894 par due 12/2016)
 
1.00% PIK
   
12/31/2006
   
72,871
   
54,670
 
$

0.75

(4)
     
        Common stock (10,000 shares)         12/31/2006     10,000       $ (5)      
        Common stock (30,000 shares)         12/31/2006     30,000       $ (5)      

Ivy Hill Asset Management, L.P.
     
Member interest
             
3,586
   
11,088
             

Ivy Hill Middle Market Credit Fund, Ltd. (7)(8)(9)
 
Investment company
 
Class B deferrable interest notes ($40,000 par due 11/2018)
 
6.72%
(Libor + 6.00%/Q)
   
11/20/2007
   
40,000
   
36,800
 
$

0.92
       
        Subordinated notes ($15,681 par due 11/2018)         11/20/2007     15,681     14,113   $ 0.90 (5)      

Imperial Capital Group, LLC and Imperial Capital Private Opportunities, LP(6)(9)
 
Investment banking services
 
Limited partnership interest (80% interest)
       
5/10/2007
   
3,094
   
3,094
   
(5)
     
        Common units (7,710 units)         5/10/2007     14,997     20,000   $ 2,594.03 (5)      
        Common units (2,526 units)         5/10/2007     3     3   $ 1.00 (5)      

F-67


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Common units (315 units)         5/10/2007           $ (5)      

Partnership Capital Growth Fund I, LP(9)
 
Investment partnership
 
Limited partnership interest (25% interest)
       
6/16/2006
   
2,711
   
2,711
   
(5)
     

Trivergance Capital Partners, LP(9)
 
Investment partnership
 
Limited partnership interest (100% interest)
       
6/5/2008
   
1,672
   
1,672
   
(5)
     

VSC Investors LLC(9)
 
Investment company
 
Membership interest (4.63% interest)
       
1/24/2008
   
635
   
635
   
(5)
     
                                         
                        205,383     148,197           12.12 %
                                         

Services—Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

American Residential Services, LLC
 
Plumbing, heating and air-conditioning services
 
Junior secured loan ($20,403 par due 4/2015)
 
10.00% Cash,
2.00% PIK
   
4/17/2007
   
20,505
   
19,685
 
$

0.96

(2)(4)
     

Diversified Collection Services, Inc.
 
Collections services
 
Senior secured loan ($10,529 par due 8/2011)
 
9.50%
(Libor + 6.75%/M)
   
2/2/2005
   
8,849
   
10,529
 
$

1.00

(15)
     
        Senior secured loan ($3,747 par due 8/2011)   9.50%
(Libor + 6.75%/M)
    2/2/2005     3,747     3,747   $ 1.00 (3)(15)      
        Senior secured loan ($323 par due 8/2011)   9.50%
(Libor + 6.75%/Q)
    2/2/2005     272     323   $ 1.00 (15)      
        Senior secured loan ($115 par due 8/2011)   9.50%
(Libor + 6.75%/Q)
    2/2/2005     115     115   $ 1.00 (3)(15)      
        Senior secured loan ($1,931 par due 2/2011)   13.75%
(Libor + 11.00%/M)
    2/2/2005     1,931     1,931   $ 1.00 (15)      
        Senior secured loan ($7,492 par due 8/2011)   13.75%
(Libor + 11.00%/M)
    2/2/2005     7,492     7,492   $ 1.00 (15)      
        Preferred stock (14,927 shares)         5/18/2006     169     264   $ 17.69 (5)      
        Common stock (114,004 shares)         2/2/2005     295     286   $ 2.51 (5)      

GCA Services Group, Inc.
 
Custodial services
 
Senior secured loan ($20,865 par due 12/2011)
 
12.00%
   
12/15/2006
   
23,193
   
23,255
 
$

1.00

(2)
     
        Senior secured loan ($5,000 par due 12/2011)   12.00%     12/15/2006     4,755     4,768   $ 1.00        
        Senior secured loan ($10,346 par due 12/2011)   12.00%     12/15/2006     9,840     9,866   $ 1.00 (3)      

Growing Family, Inc. and GFH Holdings, LLC
 
Photography services
 
Senior secured revolving loan ($1,513 par due 8/2011)
 
10.50%
(Libor + 3.00% Cash,
4.00% PIK/A)
   
3/16/2007
   
1,513
   
454
 
$

0.30

(4)(14)(15)
     
        Senior secured loan ($11,188 par due 8/2011)   13.00%
(Libor + 3.50% Cash,
6.00% PIK/Q)
    3/16/2007     11,188     3,356   $ 0.30 (4)(14)(15)      
        Senior secured loan ($372 par due 8/2011)   11.25%
(Base Rate + 8.00%/A)
    3/16/2007     372     111   $ 0.30 (4)(14)(15)      

F-68


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Senior secured loan ($3,575 par due 8/2011)   15.50%
(Libor + 6.00% Cash,
6.00% PIK/Q)
    3/16/2007     3,575     1,073   $ 0.30 (4)(14)(15)      
        Senior secured loan ($147 par due 8/2011)   15.50%
(Libor + 6.00% Cash,
6.00% PIK/Q)
    3/16/2007     147     44   $ 0.30 (4)(14)(15)      
        Common stock (552,430 shares)         3/16/2007     872       $ (5)      

NPA Acquisition, LLC
 
Powersport vehicle auction operator
 
Junior secured loan ($12,000 par due 2/2013)
 
6.99%
(Libor + 6.75%/M)
   
8/23/2006
   
12,000
   
12,000
 
$

1.00

(3)
     
        Common units (1,709 shares)         8/23/2006     1,000     2,300   $ 1,345.82 (5)      

Web Services Company, LLC
 
Laundry service and equipment provider
 
Senior secured loan ($4,950 par due 8/2014)
 
5.30%
(Libor + 5.00%/Q)
   
6/15/2009
   
4,582
   
4,802
 
$

0.97

(4)
     
        Senior subordinated loan ($18,103 par due 8/2016)   11.50% Cash,
2.50% PIK
    8/29/2008     18,103     17,198   $ 0.95 (4)      
        Senior subordinated loan ($25,640 par due 8/2016)   11.50% Cash,
2.50% PIK
    8/29/2008     25,640     24,358   $ 0.95 (2)(4)      
                                         
                        160,155     147,957           12.10 %
                                         

Business Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Booz Allen Hamilton, Inc.
 
Strategy and technology consulting services
 
Senior secured loan ($743 par due 7/2015)
 
7.50%
(Libor + 4.50%/S)
   
7/31/2008
   
728
   
743
 
$

1.00

(3)(15)
     
        Senior subordinated loan ($22,400 par due 7/2016)   11.00% Cash,
2.00% PIK
    7/31/2008     22,196     22,400   $ 1.00 (2)(4)(15)      
        Senior subordinated loan ($250 par due 7/2016)   11.00% Cash,
2.00% PIK
    7/31/2008     220     250   $ 1.00 (2)(4)      

Investor Group Services, LLC(6)
 
Financial services
 
Limited liability company membership interest (10.00% interest)
       
6/22/2006
   
   
500
   
(5)
     

Pillar Holdings LLC and PHL Holding Co.(6)
 
Mortgage services
 
Senior secured revolving loan ($375 par due 11/2013)
 
5.80%
(Libor + 5.50%/B)
   
11/20/2007
   
375
       
$

1.00
       
        Senior secured revolving loan ($938 par due 11/2013)   5.80%
(Libor + 5.50%/B)
    11/20/2007     938     938   $ 1.00        
        Senior secured loan ($1,875 par due 5/2014)   14.50%     7/31/2008     1,875     1,875   $ 1.00        
        Senior secured loan ($5,500 par due 5/2014)   14.50%     7/31/2008     5,500     5,500   $ 1.00        
        Senior secured loan ($16,902 par due 11/2013)   5.80%
(Libor + 5.50%/B)
    11/20/2007     16,902     16,902   $ 1.00 (2)      
        Senior secured loan ($10,550 par due 11/2013)   5.80%
(Libor + 5.50%/B)
    11/20/2007     10,550     10,550   $ 1.00 (3)      
        Common stock (84.78 shares)         11/20/2007     3,768     7,234   $ 85,105.88 (5)      

F-69


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 

Primis Marketing Group, Inc. and Primis Holdings, LLC(6)
 
Database marketing services
 
Senior subordinated note ($10,222 par due 2/2013)
 
13.50% Cash,
2.00% PIK
   
8/24/2006
   
10,222
   
511
 
$

0.05

(4)(14)
     
        Preferred units (4,000 units)         8/24/2006     3,600         (5)      
        Common units (4,000,000 units)         8/24/2006     400         (5)      

Prommis Solutions, LLC, E-Default Services, LLC, Statewide Tax and Title Services, LLC & Statewide Publishing Services, LLC (formerly known as MR Processing Holding Corp.)
 
Bankruptcy and foreclosure processing services
 
Senior subordinated note ($26,394 par due 2/2014)
 
11.50% Cash,
2.00% PIK
   
2/8/2007
   
26,394
   
25,866
 
$

0.98

(4)
     
        Senior subordinated note ($26,498 par due 2/2014)   11.50% Cash,
2.00% PIK
    2/8/2007     26,498     25,968   $ 0.98 (2)(4)      
        Preferred stock (30,000 shares)         4/11/2006     3,000     6,221   $ 207.37 (5)      

R2 Acquisition Corp.
 
Marketing services
 
Common stock (250,000 shares)
       
5/29/2007
   
250
   
250
 
$

1.00

(5)
     

Summit Business Media, LLC
 
Business media consulting services
 
Junior secured loan ($10,669 par due 11/2013)
 
15.00% PIK
   
8/3/2007
   
10,276
   
1,600
 
$

0.15

(3)(4)(14)
     

VSS-Tranzact Holdings, LLC(6)
 
Management consulting services
 
Common membership interest (8.51% interest)
       
10/26/2007
   
10,000
   
6,000
   
(5)
     
                                         
                        153,692     133,683           10.93 %
                                         

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Apogee Retail, LLC
 
For-profit thrift retailer
 
Senior secured loan ($1,863 par due 3/2012)
 
5.49%
(Libor + 5.25%/M)
   
3/27/2007
   
1,863
   
1,677
 
$

0.90
       
        Senior secured loan ($2,977 par due 3/2012)   5.49%
(Libor + 5.25%/M)
    3/27/2007     2,977     2,679   $ 0.90        
        Senior secured loan ($11,296 par due 11/2012)   12.00% Cash,
4.00% PIK
    5/28/2008     11,296     11,296   $ 1.00 (4)      
        Senior secured loan ($26,738 par due 3/2012)   5.50%
(Libor + 5.25%/M)
    3/27/2007     26,738     24,065   $ 0.90 (2)      
        Senior secured loan ($11,700 par due 3/2012)   5.50%
(Libor + 5.25%/M)
    3/27/2007     11,700     10,530   $ 0.90 (3)      

Dufry AG(8)
 
Retail newstand operator
 
Common stock (39,056 shares)
       
3/28/2008
   
3,000
   
2,200
 
$

56.33

(5)
     

Savers, Inc. and SAI Acquisition Corporation
 
For-profit thrift retailer
 
Senior subordinated note ($6,044 par due 8/2014)
 
10.00% Cash,
2.00% PIK
   
8/8/2006
   
6,044
   
5,923
 
$

0.98

(4)
     
        Senior subordinated note ($22,236 par due 8/2014)   10.00% Cash,
2.00% PIK
    8/8/2006     22,236     21,792   $ 0.98 (2)(4)      
        Common stock (1,170,182 shares)         8/8/2006     4,500     5,840   $ 4.99 (5)      

F-70


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 

Things Remembered, Inc. and TRM Holdings Corporation
 
Personalized gifts retailer
 
Senior secured loan ($4,506 par due 9/2012)
 
5.5% Cash,
1.00% PIK Option
   
9/28/2006
   
4,506
   
3,154
 
$

0.70

(3)
     
        Senior secured loan ($7,303 par due 9/2012)   5.5% Cash,
1.00% PIK Option
    9/28/2006     7,303     5,112   $ 0.70 (3)      
        Senior secured loan ($28,402 par due 9/2012)   5.5% Cash,
1.00% PIK Option
    9/28/2006     28,402     19,882   $ 0.70 (2)      
        Preferred stock (800 shares)         9/28/2006     200       $ (5)      
        Common stock (80 shares)         9/28/2006     1,800       $ (5)      
        Warrants to purchase 858 shares of commons shares         3/19/2009           $ (5)      
        Warrants to purchase 73 shares of Preferred shares         3/19/2009           $ (5)      
                                         
                        132,565     114,150           9.34 %
                                         

Manufacturing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arrow Group Industries, Inc.
 
Residential and outdoor shed manufacturer
 
Senior secured loan ($5,616 par due 4/2010)
 
5.28%
(Libor + 5.00%/Q)
   
3/28/2005
   
5,653
   
5,223
 
$

0.93

(3)(15)
     

Emerald Performance Materials, LLC
 
Polymers and performance materials manufacturer
 
Senior secured loan ($9,018 par due 5/2011)
 
8.25%
(Libor + 4.25%/M)
   
5/16/2006
   
9,018
   
8,657
 
$

0.96

(3)(15)
     
        Senior secured loan ($536 par due 5/2011)   8.25%
(Libor + 4.25%/M)
    5/16/2006     536     515   $ 0.96 (3)(15)      
        Senior secured loan ($156 par due 5/2011)   8.50%
(Base + 5.25%/M)
    5/16/2006     156     150   $ 0.96 (3)(15)      
        Senior secured loan ($1,604 par due 5/2011)   10.00%
(Libor + 6.00%/M)
    5/16/2006     1,604     1,508   $ 0.94 (3)(15)      
        Senior secured loan ($4,900 par due 5/2011)   13.00% Cash,
3.00% PIK
    5/16/2006     4,900     4,704   $ 0.96 (2)(4)      

Qualitor, Inc.
 
Automotive aftermarket components supplier
 
Senior secured loan ($1,743 par due 12/2011)
 
6.00%
(Base Rate + 2.75%/M)
   
12/29/2004
   
1,743
   
1,656
 
$

0.95

(3)
     
        Junior secured loan ($5,000 par due 6/2012)   9.00%
(Base Rate + 5.75%/M)
    12/29/2004     5,000     4,750   $ 0.95 (3)      

Reflexite Corporation(7)
 
Developer and manufacturer of high-visibility reflective products
 
Senior subordinated loan ($16,557 par due 2/2015)
 
12.50% Cash,
5.50% PIK
   
2/28/2008
   
16,557
   
16,557
 
$

1.00

(4)
     
        Common stock (1,821,860 shares)         3/28/2006     27,435     24,898   $ 13.67 (5)      

Saw Mill PCG Partners LLC
 
Precision components manufacturer
 
Common units (1,000 units)
       
2/2/2007
   
1,000
   
 
$


(5)
   

F-71


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 

UL Holding Co., LLC
 
Petroleum product manufacturer
 
Senior secured loan ($10,945 par, due 12/2012)
 
9.34%
(Libor + 8.88%/Q)
   
2/13/2009
   
10,945
   
10,726
 
$

0.98

(5)
     
        Senior secured loan ($2,985 par, due 12/2012)   14.00%     2/13/2009     2,985     2,925   $ 0.98 (5)      
        Senior secured loan ($2,985 par, due 12/2012)   14.00%     2/13/2009     2,985     2,925   $ 0.98 (5)      
        Senior secured loan ($995 par, due 12/2012)   14.00%     2/13/2009     995     975   $ 0.98 (5)      
        Senior secured loan ($2,985 par, due 12/2012)   9.35%
(Libor + 8.88% / Q)
    2/13/2009     2,985     2,925   $ 0.98 (5)      
        Common units (50,000 units)         4/25/2008     500     500   $ 10.00 (5)      
        Common units (50,000 units)         4/25/2008           $ (5)      

Universal Trailer Corporation(6)
 
Livestock and specialty trailer manufacturer
 
Common stock (74,920 shares)
       
10/8/2004
   
7,930
   
 
$


(5)
     
                                         
                        102,927     89,594           7.33 %
                                         

Printing, Publishing and Media

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canon Communications LLC
 
Print publications services
 
Junior secured loan ($11,907 par due 11/2011)
 
13.75%
(Libor + 8.75% Cash,
2.00% PIK/Q)
   
5/25/2005
   
11,902
   
10,121
 
$

0.85

(2)(4)(15)
     
        Junior secured loan ($12,134 par due 11/2011)   13.75%
(Base Rate + 8.75% Cash,
2.00% PIK/Q)
    5/25/2005     12,130     10,314   $ 0.85 (3)(4)(15)      

Courtside Acquisition Corp.
 
Community newspaper publisher
 
Senior subordinated loan ($34,295 par due 6/2014)
 
17.00% PIK
   
6/29/2007
   
34,295
   
 
$


(4)(14)
     

LVCG Holdings LLC(7)
 
Commercial printer
 
Membership interests (56.53% interest)
       
10/12/2007
   
6,600
   
1,980
 
$


(5)
     

National Print Group, Inc.
 
Printing management services
 
Senior secured revolving loan ($1,826 par due 3/2012)
 
9.00%
(Libor + 6.00%/S)
   
3/2/2006
   
1,826
   
1,114
 
$

0.61

(15)
     
        Senior secured revolving loan ($343 par due 3/2012)   8.25%
(Base Rate + 5.00%/M)
    3/2/2006     272     166   $ 0.61 (15)      
        Senior secured loan ($6,942 par due 3/2012)   16.00%
(Base Rate + 9.00 Cash,
4.00% PIK/Q)
    3/2/2006     6,888     4,235   $ 0.75 (3)(15)(4)      
        Senior secured loan ($1,405 par due 3/2012)   16.00%
(Base Rate + 8.00 Cash,
4.00% PIK/M)
    3/2/2006     1,128     693   $ 0.75 (3)(15)(4)      
        Preferred stock (9,344 shares)         3/2/2006     2,000       $ (5)      

The Teaching Company, LLC and The Teaching Company Holdings, Inc.(11)
 
Education publications provider
 
Senior secured loan ($18,000 par due 9/2012)
 
10.50%
   
9/29/2006
   
18,000
   
18,000
 
$

1.00

(2)(11)
   

F-72


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Senior secured loan ($10,000 par due 9/2012)   10.50%     9/29/2006     10,000     10,000   $ 1.00 (3)(11)      
        Preferred stock (29,969 shares)   8.00%     9/29/2006     2,997     3,873   $ 129.23 (5)      
        Common stock (15,393 shares)         9/29/2006     3     4   $ 0.26 (5)      
                                         
                        108,041     60,500           4.95 %
                                         

Aerospace & Defense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AP Global Holdings, Inc.
 
Safety and security equipment manufacturer
 
Senior secured loan ($7,813 par due 10/2013)
 
4.75%
(Libor + 4.50%/M)
   
11/8/2007
   
7,671
   
7,110
 
$

0.91

(3)
     

ILC Industries, Inc.
 
Industrial products provider
 
Junior secured loan ($12,000 par due 8/2012)
 
11.50%
   
6/27/2006
   
12,000
   
12,000
 
$

1.00

(3)
     

Thermal Solutions LLC and TSI Group, Inc.
 
Thermal management and electronics packaging manufacturer
 
Senior secured loan ($572 par due 3/2011)
 
4.03%
(Libor + 3.75%/Q)
   
3/28/2005
   
572
   
549
 
$

0.96

(3)
     
        Senior secured loan ($2,740 par due 3/2012)   4.53%
(Libor + 4.25%/Q)
    3/28/2005     2,740     2,494   $ 0.91 (3)      
        Senior subordinated notes ($2,730 par due 3/2013)   11.50% Cash,
2.50% PIK
    3/21/2006     2,730     2,593   $ 0.97 (2)(4)      
        Senior subordinated notes ($2,150 par due 9/2012)   11.50% Cash,
2.75% PIK
    3/28/2005     2,150     2,042   $ 0.97 (4)      
        Senior subordinated notes ($3,394 par due 9/2012)   11.50% Cash,
2.75% PIK
    3/28/2005     3,394     3,225   $ 0.97 (2)(4)      
        Preferred stock (71,552 shares)         3/28/2005     716     716   $ 10.00 (5)      
        Common stock (1,460,246 shares)         3/28/2005     15     15   $ 0.01 (5)      

Wyle Laboratories, Inc. and Wyle Holdings, Inc.
 
Provider of specialized engineering, scientific and technical services
 
Junior secured loan ($16,000 par due 7/2014)
 
15.00%
   
1/17/2008
   
16,000
   
16,000
 
$

1.00
       
        Junior secured loan ($12,000 par due 7/2014)   15.00%     1/17/2008     12,000     12,000   $ 1.00 (3)      
        Junior Preferred stock (14,655 shares)   10.00% PIK     1/17/2008     1,816     1,455   $ 99.28 (4)(5)      
        Senior Preferred stock (775 shares)   8.00% PIK     1/17/2008     96     77   $ 99.35 (4)(5)      
        Common stock (151,439 shares)         1/17/2008     188     148   $ 0.98 (5)      
                                         
                        62,088     60,424           4.94 %
                                         

Consumer Products—Non-Durable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Innovative Brands, LLC
 
Consumer products and personal care manufacturer
 
Senior secured loan ($9,059 par due 9/2011)
 
15.50%
   
10/12/2006
   
9,059
   
9,059
 
$

1.00
       

F-73


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Senior secured loan ($8,362 par due 9/2011)   15.50%     10/12/2006     8,362     8,362   $ 1.00 (3)      

Making Memories Wholesale, Inc.(7)
 
Scrapbooking branded products manufacturer
 
Senior secured loan ($9,875 par due 8/2014)
 
10.00%
(Libor + 6.50%/Q)
   
8/21/2009
   
7,869
   
9,875
 
$

1.00

(15)
     
        Senior secured loan ($5,042 par due 8/2014)   15.00%
(7.50% Cash,
7.50% PIK/Q)
    8/21/2009     4,070     3,025   $ 0.60 (4)      
        Common stock (100 shares)         8/21/2009           $ (5)      

Shoes for Crews, LLC
 
Safety footwear and slip-related mat manufacturer
 
Senior secured loan ($302 par due 7/2010)
 
5.50%
(Base + 2.25%/Q)
   
10/8/2004
   
304
   
302
 
$

1.00

(3)
     

The Thymes, LLC(7)
 
Cosmetic products manufacturer
 
Preferred stock (6,283 shares)
 
8.00% PIK
   
6/21/2007
   
6,283
   
5,654
 
$

899.89

(4)
     
        Common stock (5,400 shares)         6/21/2007           $ (5)      

Wear Me Apparel, LLC(6)
 
Clothing manufacturer
 
Senior subordinated notes ($24,110 par due 4/2013)
 
17.50% PIK
   
4/2/2007
   
24,110
   
18,083
 
$

0.75

(4)(14)
     
        Common stock (10,000 shares)         4/2/2007     10,000       $ (5)      
                                         
                        70,057     54,360           4.45 %
                                         

Telecommunications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

American Broadband Communications, LLC and American Broadband Holding Company
 
Broadband communication services
 
Senior subordinated loan ($34,004 par due 11/2014)
 
18.00%
(10.00% Cash,
8.00% PIK/Q)
   
2/8/2008
   
34,004
   
34,004
 
$

1.00

(4)
     
        Senior subordinated loan ($8,580 par due 11/2014)   18.00%
(10.00% Cash,
8.00% PIK/Q)
    11/7/2007     8,580     8,580   $ 1.00 (4)      
        Warrants to purchase 170 shares         11/7/2007           $ (5)      
                                         
                        42,584     42,584           3.48 %
                                         

Environmental Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AWTP, LLC
 
Water treatment services
 
Junior secured loan ($9,510 par due 12/2012)
 
11.50%
(Base Rate + 8.25%/Q)
   
12/23/2005
   
9,510
   
4,755
 
$

0.50

(4)(14)
     
        Junior secured loan ($4,172 par due 12/2012)   11.50%
(Base Rate + 8.25%/Q)
    12/23/2005     4,172     2,086   $ 0.50 (3)(4)(14)      

Mactec, Inc.
 
Engineering and environmental services
 
Class B-4 stock (16 shares)
       
11/3/2004
   
   
 
$


(5)
     
        Class C stock (5,556 shares)         11/3/2004         150   $ 27.00 (5)      

Sigma International Group, Inc.
 
Water treatment parts manufacturer
 
Junior secured loan ($4,000 par due 10/2013)
 
15.00%
(Libor + 7.00%/Q)
   
10/11/2007
   
4,000
   
2,800
 
$

0.70

(3)(15)
     
        Junior secured loan ($1,833 par due 10/2013)   15.00%
(Libor + 7.00%/Q)
    10/11/2007     1,833     1,283   $ 0.70 (2)(15)      

F-74


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Junior secured loan ($2,750 par due 10/2013)   15.00%
(Libor + 7.00%/Q)
    11/1/2007     2,750     1,925   $ 0.70 (2)(15)      
        Junior secured loan ($6,000 par due 10/2013)   15.00%
(Libor + 7.00%/Q)
    11/1/2007     6,000     4,200   $ 0.70 (3)(15)      
        Junior secured loan ($2,000 par due 10/2013)   15.00%
(Libor + 7.00%/Q)
    11/6/2007     2,000     1,400   $ 0.70 (3)(15)      
        Junior secured loan ($917 par due 10/2013)   15.00%
(Libor + 7.00%/Q)
    11/6/2007     917     642   $ 0.70 (2)(15)      

Waste Pro USA, Inc.
 
Waste management services
 
Class A Common Equity (611,614.80 shares)
       
11/9/2006
   
12,263
   
13,263
 
$

21.69

(4)
     

Wastequip, Inc.(6)
 
Waste management equipment manufacturer
 
Senior subordinated loan ($13,121 par due 2/2015)
 
10.00% Cash,
2.00% PIK
   
2/5/2007
   
13,030
   
3,936
 
$

0.30

(4)
     
        Common stock (13,889 shares)         2/2/2007     1,389       $ (5)      
                                         
                        57,864     36,440           2.98 %
                                         

Computers and Electronics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RedPrairie Corporation
 
Software manufacturer
 
Junior secured loan ($3,300 par due 1/2013)
 
6.97%
(Libor + 6.50%/Q)
   
7/13/2006
   
3,300
   
3,135
 
$

0.95

(2)
     
        Junior secured loan ($12,000 par due 1/2013)   6.97%
(Libor + 6.50%/Q)
    7/13/2006     12,000     11,400   $ 0.95 (3)      

TZ Merger Sub, Inc.
 
Computers and Electronics
 
Senior secured loan ($4,830 par due 07/2015)
 
7.50%
(Libor + 4.50%/Q)
   
6/15/2009
   
4,726
   
4,830
 
$

1.00

(2)(15)
     

X-rite, Incorporated
 
Artwork software manufacturer
 
Junior secured loan ($3,116 par due 7/2013)
 
14.38%
(Libor + 10.38%/Q)
   
7/6/2006
   
3,116
   
3,116
 
$

1.00

(15)
     
        Junior secured loan ($7,790 par due 7/2013)   14.38%
(Libor + 10.38%/Q)
    7/6/2006     7,790     7,790   $ 1.00 (3)(15)      
                                         
                        30,932     30,271           2.48 %
                                         

Cargo Transport

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Kenan Advantage Group, Inc.
 
Fuel transportation provider
 
Senior subordinated notes ($25,899 par due 12/2013)
 
9.50% Cash,
3.50% PIK
   
12/15/2005
   
25,899
   
25,381
 
$

0.95

(2)(4)
     
        Senior secured loan ($2,407 par due 12/2011)   3.00%
(Libor + 2.75%/M)
    12/15/2005     2,407     2,238   $ 0.93 (3)      
        Preferred stock (10,984 shares)         12/15/2005     1,098     1,459   $ 132.83 (4)(5)      
        Common stock (30,575 shares)         12/15/2005     31     41   $ 1.34 (5)      
                                         
                        29,435     29,119           2.38 %
                                         

Health Clubs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Athletic Club Holdings, Inc.
 
Premier health club operator
 
Senior secured loan ($1,750 par due 10/2013)
 
4.74%
(Libor + 4.50%/M)
   
10/11/2007
   
1,750
   
1,540
 
$

0.88

(13)
   

F-75


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Senior secured loan ($1,000 par due 10/2013)   4.75%
(Libor + 4.50%/M)
    10/11/2007     1,000     880   $ 0.88 (13)      
        Senior secured loan ($11,496 par due 10/2013)   4.75%
(Libor + 4.50%/M)
    10/11/2007     11,496     10,116   $ 0.88 (3)(13)      
        Senior secured loan ($12,495 par due 10/2013)   4.75%
(Libor + 4.50%/M)
    10/11/2007     12,495     10,996   $ 0.88 (2)(13)      
        Senior secured loan ($4 par due 10/2013)   7.75%
(Base Rate + 4.50%/Q)
    10/11/2007     4     4   $ 0.88 (3)(13)      
        Senior secured loan ($5 par due 10/2013)   6.75%
(Base Rate + 3.50%/Q)
    10/11/2007     5     4   $ 0.88 (2)(13)      
                                         
                        26,750     23,540           1.93  
                                         

Containers-Packaging

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial Container Services, LLC(6)
 
Industrial container manufacturer, reconditioner and servicer
 
Senior secured loan ($681 par due 9/2011)
 
4.25%
(Libor + 4.00%/M)
   
6/21/2006
   
661
   
628
 
$

0.95

(2)
     
        Senior secured loan ($43 par due 9/2011)   4.25%
(Libor + 4.00%/M)
    6/21/2006     43     41   $ 0.95 (3)      
        Senior secured loan ($4926 par due 9/2011)   4.29%
(Libor + 4.00%/M)
    6/21/2006     4,926     4,680   $ 0.95 (2)      
        Senior secured loan ($322 par due 9/2011)   4.29%
(Libor + 4.00%/M)
    6/21/2006     322     306   $ 0.95 (3)      
        Senior secured loan ($6,157 par due 9/2011)   4.28%
(Libor + 4.00%/M)
    6/21/2006     6,157     5,850   $ 0.95 (2)      
        Senior secured loan ($402 par due 9/2011)   4.28%
(Libor + 4.00%/M)
    6/21/2006     402     382   $ 0.95 (3)      
        Senior secured loan ($98 par due 9/2011)   4.25%
(Libor + 4.00%/M)
    6/21/2006     98     93   $ 0.95 (2)      
        Senior secured loan ($1,495 par due 9/2011)   4.25%
(Libor + 4.00%/M)
    6/21/2006     1,495     1,420   $ 0.95 (3)      
        Common stock (1,800,000 shares)         9/29/2005     1,800     8,550   $ 4.75 (5)      
                                         
                        15,904     21,950           1.80 %
                                         

Grocery

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Planet Organic Health Corp.(8)
 
Organic grocery store operator
 
Junior secured loan ($860 par due 7/2014)
 
13.00%
   
7/3/2007
   
859
   
817
 
$

0.95
       
        Junior secured loan ($10,249 par due 7/2014)   13.00%     7/3/2007     10,240     9,737   $ 0.95 (3)      
        Senior subordinated loan ($12,341 par due 7/2012)   13.00% Cash,
4.00% PIK
    7/3/2007     12,288     9,873   $ 0.80 (2)(4)      
                                         
                        23,387     20,427           1.67 %
                                         

F-76


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair
Value
  Fair Value
Per Unit
  Percentage
of Net
Assets
 

Consumer Products—Durable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Buy Holdings, Inc. and Direct Buy Investors, LP(6)
 
Membership-based buying club franchisor and operator
 
Senior secured loan ($2,281 par due 11/2012)
 
6.82%
(Libor + 6.50%/M)
   
12/14/2007
   
2,199
   
1,710
 
$

0.75
       
        Partnership interests (19.31% interest)         11/30/2007     10,000     2,500       (5)      
                                         
                        12,199     4,210           0.34 %
                                         

Housing—Building Materials

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HB&G Building Products
 
Synthetic and wood product manufacturer
 
Senior subordinated loan ($8,956 par due 3/2011)
 
19.0% PIK
   
10/8/2004
   
8,984
   
448
 
$

0.05

(2)(4) (14)
     
        Common stock (2,743 shares)         10/8/2004     753       $ (5)      
        Warrants to purchase 4,464 shares         10/8/2004     653       $ (5)      
                                         
                        10,390     448           0.04 %
                                         
                      $ 2,245,137   $ 1,967,724              
                                         

(1)
Other than our investments in HCP Acquisition Holdings, LLC, Ivy Hill Middle Market Credit Fund, Ltd., LVCG Holdings LLC, Making Memories Wholesale, Inc., Reflexite Corporation and The Thymes, LLC, we do not "Control" any of our portfolio companies, as defined in the Investment Company Act. In general, under the Investment Company Act, we would "Control" a portfolio company if we owned more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. All of our portfolio company investments are subject to legal restrictions on sales which as of September 30, 2009 represented 161% of the Company's net assets.

(2)
These assets are owned by the Company's wholly owned subsidiary Ares Capital CP, are pledged as collateral for the CP Funding Facility and, as a result, are not directly available to the creditors of the Company to satisfy any obligations of the Company other than Ares Capital CP's obligations under the CP Funding Facility (see Note 7 to the consolidated financial statements). Unless otherwise noted, as of September 30, 2009, all other investments were pledged as collateral for the Revolving Credit Facility (see Note 7 to the consolidated financial statements).

(3)
Pledged as collateral for the ARCC CLO. Unless otherwise noted, as of September 30, 2009, all other investments were pledged as collateral for the Revolving Credit Facility (see Note 7 to the consolidated financial statements).

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

(5)
Non-income producing at September 30, 2009.

(6)
As defined in the Investment Company Act, we are an "Affiliated Person" of this portfolio company because we own 5% or more of the portfolio company's outstanding voting securities or we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions during the period for the nine months ended September 30, 2009 in which the issuer was an Affiliated company (but not a portfolio company that we "Control") are as follows (in thousands):

 
Company
  Purchases   Redemptions
(cost)
  Sales
(cost)
  Interest
income
  Capital
structuring
service
fees
  Dividend
Income
  Other
income
  Net
realized
gains (losses)
  Net
unrealized
gains (losses)
 
 

Apple & Eve, LLC and US Juice Partners, LLC

  $ 4,500   $ 12,831   $ 5,000   $ 4,045   $   $   $ 26   $   $ 10,423  
 

Carador, PLC

  $   $   $   $   $   $ 285   $   $   $ (1,956 )
 

Campus Management Corp. and Campus Management Acquisition Corp.

  $   $ 2,309   $ 15,000   $ 4,706   $   $   $ 78   $ (482 ) $ 800  
 

CT Technologies Intermediate Holdings, Inc. and CT Technologies Holdings, LLC

  $   $   $   $ 778   $   $   $ 9   $   $ 2,380  
 

Direct Buy Holdings, Inc. and Direct Buy Investors LP

  $   $   $   $ 97   $   $   $   $   $ (4,000 )
 

Firstlight Financial Corporation

  $   $   $   $ 2,789   $   $   $ 1,380   $   $ (11,032 )
 

Imperial Capital Group, LLC

  $ 2,210   $   $   $   $   $   $   $   $ 5,003  
 

Industrial Container Services, LLC

  $ 6,154   $ 10,349   $   $ 552   $   $   $ 122   $   $ (1,335 )
 

Investor Group Services, LLC

  $   $ 750   $   $   $   $   $ 19   $   $  
 

Pillar Holdings LLC and PHL Holding Co.

  $   $ 2,936   $   $ 2,180   $   $   $ 25   $   $ 1,967  
 

Primis Marketing Group, Inc. and Primis Holdings, LLC

  $   $   $   $   $   $   $   $   $ (511 )
 

R3 Education, Inc.

  $ 24,000   $ 31,600   $   $ 697   $   $   $ 29   $   $ 87  
 

VSS-Tranzact Holdings, LLC

  $   $   $   $   $   $   $   $   $  
 

Wastequip, Inc.

  $   $   $   $ 1,099   $   $   $   $   $ (3,950 )
 

Wear Me Apparel, LLC

  $   $   $   $ 75   $   $   $   $   $ 6,027  
(7)
As defined in the Investment Company Act, we are an "Affiliated Person" of this portfolio company because we own 5% or more of the portfolio company's outstanding voting securities or we have the power to exercise control over the management or policies of such portfolio company (including through a

F-77


 
Company
  Purchases   Redemptions
(cost)
  Sales
(cost)
  Interest
income
  Capital
structuring
service
fees
  Dividend
Income
  Other
income
  Net
realized
gains (losses)
  Net
unrealized
gains (losses)
 
 

HCP Acquisition Holdings, LLC

  $ 1,495   $   $   $   $   $   $   $   $ (801 )
 

Ivy Hill Asset Management, LP

  $ 3,816   $   $ 236   $   $   $ 1,511   $   $ 494   $ 7,502  
 

Ivy Hill Middle Market Credit Fund, Ltd.

  $   $   $ 131   $ 4,072   $   $   $ 1,265   $   $ 813  
 

LVCG Holdings, LLC

  $   $   $   $   $   $   $ 50   $   $ (6,520 )
 

Making Memories Wholesale, Inc.

  $ 11,953   $ 100   $ 26,177   $ 181   $   $   $ 1   $ (14,198 ) $ 15,111  
 

R3 Education, Inc.

  $ 15,613   $ 6,050   $   $ 652   $   $   $ 17   $   $ (3,616 )
 

Reflexite Corporation

  $ 7,800   $   $ 2,000   $ 2,067   $ 194   $   $ 71   $   $ (10,603 )
 

The Thymes, LLC

  $   $   $   $ 376   $   $   $   $   $ 629  
(8)
Non-U.S. company or principal place of business outside the U.S. and as a result is not a qualifying asset under Section 55(a) of the Investment Company Act. Under the Investment Company Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.

(9)
Non-registered investment company.

(10)
A majority of the variable rate loans to our portfolio companies bear interest at a rate that may be determined by reference to either Libor or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower's option, which reset annually (A), semi-annually (S), quarterly (Q), bi-monthly (B), monthly (M) or daily (D). For each such loan, we have provided the interest rate in effect at September 30, 2009.

(11)
In addition to the interest earned based on the stated interest rate of this security, we are entitled to receive an additional interest amount of 2.50% on $19.6 million aggregate principal amount of the portfolio company's senior term debt previously syndicated by us.

(12)
Principal amount denominated in Canadian dollars has been translated into U.S. dollars (see Note 2 to the consolidated financial statements).

(13)
In addition to the interest earned based on the stated interest rate of this security, we are entitled to receive an additional interest amount of 2.50% on $25.0 million aggregate principal amount of the portfolio company's senior term debt previously syndicated by us.

(14)
Loan was on non-accrual status as of September 30, 2009.

(15)
Loan includes interest rate floor feature.

(16)
In addition to the interest earned based on the stated interest rate of this security, we are entitled to receive an additional interest amount of 2.98% on $15.0 million aggregate principal amount of the portfolio company's senior term debt previously syndicated by us.

F-78



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of December 31, 2008

(dollar amounts in thousands, except per unit data)

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

Capella Healthcare, Inc.

 

Acute care hospital operator

 

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

 

13.00%

 

 

2/29/2008

 

 

70,000

 

 

63,000

 

$

0.90

 

 

 

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

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

 

Healthcare analysis services

 

Preferred stock (7,427 shares)

 

14.00% PIK

 

 

6/15/2007

 

 

7,427

 

 

7,427

 

$

1,000.00

(4)

 

 

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

DSI Renal, Inc.

 

Dialysis provider

 

Senior secured revolving loan ($142 par due 3/2013)

 

6.25%
(Base Rate + 3.00%/D)

 

 

4/4/2006

 

 

142

 

 

127

 

$

0.89

 

 

 

 
        Senior secured revolving loan ($3,520 par due 3/2013)   3.47%
(Libor + 3.00%/M)
    4/4/2006     3,520     3,168   $ 0.90        
        Senior secured revolving loan ($1,120 par due 3/2013)   3.47%
(Libor + 3.00%/M)
    4/4/2006     1,120     1,008   $ 0.90        
        Senior secured revolving loan ($1,152 par due 3/2013)   4.50%
(Libor + 3.00%/Q)
    4/4/2006     1,152     1,037   $ 0.90        
        Senior secured revolving loan ($1,600 par due 3/2013)   4.50%
(Libor + 3.00%/Q)
    4/4/2006     1,600     1,440   $ 0.90        
        Senior subordinated note ($29,589 par due 4/2014)   12.00% Cash,
2.00% PIK
    4/4/2006     29,658     21,896   $ 0.74 (4)      
        Senior subordinated note ($26,927 par due 4/2014)   12.00% Cash,
2.00% PIK
    4/4/2006     26,971     19,847   $ 0.73 (2)(4)      

F-79


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Senior subordinated note ($12,211 par due 4/2014)   12.00% Cash,
2.00% PIK
    4/4/2006     12,231     9,036   $ 0.74 (3)(4)      

GG Merger Sub I, Inc.

 

Drug testing services

 

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

 

7.09%
(Libor + 4.00%/S)

 

 

12/14/2007

 

 

22,426

 

 

18,938

 

$

0.81

 

 

 

 

HCP Acquisition Holdings, LLC(7)

 

Healthcare compliance advisory services

 

Class A units (8,566,824 units)

 

 

 

 

6/26/2008

 

 

8,567

 

 

6,500

 

$

0.76

(5)

 

 

 

Heartland Dental Care, Inc.

 

Dental services

 

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

 

11.00% Cash,
3.25% PIK

 

 

7/31/2008

 

 

40,217

 

 

40,217

 

$

1.00

(4)

 

 

 

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

 

Healthcare equipment services

 

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

 

9.19%
(Libor + 6.25%/S)

 

 

1/31/2007

 

 

20,000

 

 

7,000

 

$

0.35

 

 

 

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

MWD Acquisition Sub, Inc.

 

Dental services

 

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

 

8.13%
(Libor + 6.25%/M)

 

 

5/3/2007

 

 

5,000

 

 

4,250

 

$

0.85

(3)

 

 

 

OnCURE Medical Corp.

 

Radiation oncology care provider

 

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

 

11.00% Cash,
1.50% PIK

 

 

8/18/2006

 

 

32,176

 

 

28,935

 

$

0.90

(4)

 

 

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

Passport Health Communications, Inc., Passport Holding Corp. and Prism Holding Corp.

 

Healthcare technology provider

 

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

 

10.50%
(Libor + 7.50%/S)

 

 

5/9/2008

 

 

12,935

 

 

12,671

 

$

0.98

(15)

 

 

 
        Senior secured loan ($11,940 par due 5/2014)   10.50%
(Libor + 7.50%/S)
    5/9/2008     11,940     11,701   $ 0.98 (3)(15)      
        Series A preferred stock (1,594,457 shares)         7/30/2008     9,900     9,902   $ 6.21 (5)      
        Common stock (16,106 shares)         7/30/2008     100     100   $ 6.21 (5)      

PG Mergersub, Inc.

 

Provider of patient surveys, management reports and national databases for the integrated healthcare delivery system

 

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

 

12.50%

 

 

3/12/2008

 

 

4,901

 

 

4,750

 

$

0.95

 

 

 

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

The Schumacher Group of Delaware, Inc.

 

Outsourced physician service provider

 

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

 

11.00% Cash,
2.50% PIK

 

 

7/18/2008

 

 

35,849

 

 

35,849

 

$

1.00

(4)

 

 

 

F-80


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

Triad Laboratory Alliance, LLC

 

Laboratory services

 

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

 

12.00% Cash,
1.75% PIK

 

 

12/21/2005

 

 

15,354

 

 

14,894

 

$

0.97

(4)

 

 

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

VOTC Acquisition Corp.

 

Radiation oncology care provider

 

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

 

11.00% Cash,
2.00% PIK

 

 

6/30/2008

 

 

3,068

 

 

3,068

 

$

1.00

(4)

 

 

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

Education

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

ELC Acquisition Corporation

 

Developer, manufacturer and retailer of educational products

 

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

 

5.45%
(Libor + 3.25%/Q)

 

 

11/30/2006

 

 

243

 

 

219

 

$

0.90

(3)

 

 

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

Instituto de Banca y Comercio, Inc.(8)

 

Private school operator

 

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

 

5.00%
(Libor + 3.00%/Q)

 

 

3/15/2007

 

 

1,643

 

 

1,643

 

$

1.00

 

 

 

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

F-81


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

Lakeland Finance, LLC

 

Private school operator

 

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

 

11.50%

 

 

12/13/2005

 

 

18,000

 

 

16,920

 

$

0.94

 

 

 

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

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

 

Medical school operator

 

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

 

8.25%
(Base Rate + 5.00%/D)

 

 

4/3/2007

 

 

3,850

 

 

3,773

 

$

0.98

 

 

 

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

Restaurants and Food Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
ADF Capital, Inc. & ADF Restaurant Group, LLC   Restaurant owner and operator   Senior secured revolving loan ($1,381 par due 11/2013)   5.75%
(Base Rate + 2.50%/D)
    11/27/2006     1,381     1,313   $ 0.95        
        Senior secured revolving loan ($2,005 par due 11/2013)   6.61%
(Libor + 3.00% Cash,
0.50% PIK/S)
    11/27/2006     2,005     1,905   $ 0.95 (4)      
        Senior secured loan ($2 par due 11/2012)   12.00%
(Base Rate + 7.5%/D)
    11/27/2006     2     2   $ 1.00        
        Senior secured loan ($1 par due 11/2012)   12.00%
(Base Rate + 7.5%/D)
    11/27/2006     1     1   $ 1.00 (3)      
        Senior secured loan ($22,656 par due 11/2012)   11.61%
(Libor + 7.50% Cash,
1.00% PIK/S)
    11/27/2006     22,912     21,520   $ 0.94 (4)      
        Senior secured loan ($992 par due 11/2012)   11.61%
(Libor + 7.50% Cash,
1.00% PIK/S)
    11/27/2006     992     942   $ 0.95 (2)(4)      
        Senior secured loan ($11,081 par due 11/2012)   11.61%
(Libor + 7.50% Cash,
1.00% PIK/S)
    11/27/2006     11,075     10,529   $ 0.95 (3)(4)      
        Promissory note ($12,079 par due 11/2016)   10.00% PIK     6/1/2006     12,067     12,067   $ 1.00 (4)      
        Warrants to purchase 0.61 shares         6/1/2006           $ (5)      

Encanto Restaurants, Inc.(8)

 

Restaurant owner and operator

 

Junior secured loan ($21,184 par due 8/2013)

 

7.50% Cash,
..350% PIK

 

 

8/16/2006

 

 

21,184

 

 

19,084

 

$

0.90

(2)(4)

 

 

 
        Junior secured loan ($4,035 par due 8/2013)   7.50% Cash,
3.50% PIK
    8/16/2006     4,035     3,635   $ 0.90 (3)(4)      

F-82


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

OTG Management, Inc.

 

Airport restaurant operator

 

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

 

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

 

 

6/19/2008

 

 

15,312

 

 

15,312

 

$

1.00

(4)(15)

 

 

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

Vistar Corporation and Wellspring Distribution Corp.

 

Food service distributor

 

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

 

13.50%

 

 

5/23/2008

 

 

48,625

 

 

46,680

 

$

0.96

 

 

 

 
        Senior subordinated loan ($25,000 par due 5/2015)   13.50%     5/23/2008     25,000     24,000   $ 0.96 (2)      
        Class A non-voting common stock (1,366,120 shares)         5/23/2008     7,500     3,500   $ 2.56 (5)      
                                         
                        172,091     160,490           14.66 %
                                         

Beverage, Food and Tobacco

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

 

Juice manufacturer

 

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

 

7.90%
(Libor + 6.00%/M)

 

 

10/5/2007

 

 

8,000

 

 

6,400

 

$

0.80

 

 

 

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

Best Brands Corporation

 

Baked goods manufacturer

 

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

 

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

 

 

2/15/2008

 

 

9,501

 

 

9,326

 

$

0.86

(4)

 

 

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

Bumble Bee Foods, LLC and BB Co-Invest LP

 

Canned seafood manufacturer

 

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

 

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

 

 

11/18/2008

 

 

40,706

 

 

40,706

 

$

1.00

(4)

 

 

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

Charter Baking Company, Inc.

 

Baked goods manufacturer

 

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

 

12.00% PIK

 

 

2/6/2008

 

 

5,547

 

 

5,547

 

$

1.00

(2)(4)

 

 

 
        Preferred stock (6,258 shares)         9/1/2006     2,500     2,500   $ 399.49 (5)      
                                         
                        174,355     153,655           14.03 %
                                         

F-83


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

Services—Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Diversified Collection Services, Inc.

 

Collections services

 

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

 

8.50%
(Libor + 5.75%/M)

 

 

2/2/2005

 

 

9,715

 

 

11,219

 

$

0.95

 

 

 

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

GCA Services Group, Inc.

 

Custodial services

 

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

 

12.00%

 

 

12/15/2006

 

 

25,000

 

 

25,000

 

$

1.00

(2)

 

 

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

Growing Family, Inc. and GFH Holdings, LLC

 

Photography services

 

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

 

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

 

 

3/16/2007

 

 

1,513

 

 

756

 

$

0.50

(4)

 

 

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

NPA Acquisition, LLC

 

Powersport vehicle auction operator

 

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

 

8.58%
(Libor + 6.75%/M)

 

 

8/23/2006

 

 

12,000

 

 

12,000

 

$

1.00

(3)

 

 

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

Web Services Company, LLC

 

Laundry service and equipment provider

 

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

 

11.50% Cash,
2.50% PIK

 

 

8/29/2008

 

 

17,764

 

 

17,231

 

$

0.97

(4)

 

 

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

Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

F-84


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

CIC Flex, LP(9)

 

Investment partnership

 

Limited partnership units
(1 unit)

 

 

 

 

9/7/2007

 

 

28

 

 

28

 

$

28,000.00

(5)

 

 

 

Covestia Capital Partners, LP(9)

 

Investment partnership

 

Limited partnership interest (47% interest)

 

 

 

 

6/17/2008

 

 

1,059

 

 

1,059

 

 

 

(5)

 

 

 

Firstlight Financial Corporation(6)(9)

 

Investment company

 

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

 

10.00% PIK

 

 

12/31/2006

 

 

69,910

 

 

62,919

 

$

0.90

(4)

 

 

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

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

 

Investment company

 

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

 

8.15%
(Libor + 6.00%/Q)

 

 

11/20/2007

 

 

40,000

 

 

36,000

 

$

0.90

 

 

 

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

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

 

Investment banking services

 

Limited partnership interest (80% interest)

 

 

 

 

5/10/2007

 

 

584

 

 

584

 

$

1.00

(5)

 

 

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

Partnership Capital Growth Fund I, LP(9)

 

Investment partnership

 

Limited partnership interest (25% interest)

 

 

 

 

6/16/2006

 

 

2,384

 

 

2,384

 

 

 

(5)

 

 

 

Trivergance Capital Partners, LP(9)

 

Investment partnership

 

Limited partnership interest (100% interest)

 

 

 

 

6/5/2008

 

 

723

 

 

723

 

 

 

(5)

 

 

 

VSC Investors LLC(9)

 

Investment company

 

Membership interest (4.63% interest)

 

 

 

 

1/24/2008

 

 

302

 

 

302

 

 

 

(5)

 

 

 
                                         
                        195,023     137,665           12.57 %
                                         

Business Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Investor Group Services, LLC(6)

 

Financial services

 

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

 

6.97%
(Libor + 5.50%/Q)

 

 

6/22/2006

 

 

750

 

 

750

 

$

1.00

 

 

 

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

Pillar Holdings LLC and PHL Holding Co.(6)

 

Mortgage services

 

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

 

7.53%
(Libor + 5.50%/B)

 

 

11/20/2007

 

 

375

 

 

375

 

$

1.00

 

 

 

 
        Senior secured revolving loan ($938 par due 11/2013)   7.53%
(Libor + 5.50%/B)
    11/20/2007     938     938   $ 1.00        

F-85


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Senior secured loan ($7,375 par due 5/2014)   14.50%     7/31/2008     7,375     7,375   $ 1.00        
        Senior secured loan ($18,709 par due 11/2013)   7.53%
(Libor + 5.50%/B)
    11/20/2007     18,709     18,709   $ 1.00 (2)      
        Senior secured loan ($11,678 par due 11/2013)   7.53%
(Libor + 5.50%/B)
    11/20/2007     11,678     11,678   $ 1.00 (3)      
        Common stock (85 shares)         11/20/2007     3,768     5,267   $ 61,964.71 (5)      

Primis Marketing Group, Inc. and Primis Holdings, LLC(6)

 

Database marketing services

 

Senior subordinated note ($10,222 par due 2/2013)

 

11.00% Cash,
2.50% PIK

 

 

8/24/2006

 

 

10,222

 

 

1,022

 

$

0.10

(4)(14)

 

 

 
        Preferred units (4,000 units)         8/24/2006     3,600       $ (5)      
        Common units (4,000,000 units)         8/24/2006     400       $ (5)      

Prommis Solutions, LLC, E-Default Services, LLC, Statewide Tax and Title Services, LLC & Statewide Publishing Services, LLC (formerly known as MR Processing Holding Corp.)

 

Bankruptcy and foreclosure processing services

 

Senior subordinated note ($26,007 par due 2/2014)

 

11.50% Cash,
2.00% PIK

 

 

2/8/2007

 

 

26,007

 

 

24,713

 

$

0.95

(4)

 

 

 
        Senior subordinated note ($26,109 par due 2/2014)   11.50% Cash,
2.00% PIK
    2/8/2007     26,109     24,810   $ 0.95 (2)(4)      
        Preferred stock (30,000 shares)         4/11/2006     3,000     4,000   $ 133.33 (5)      

R2 Acquisition Corp.

 

Marketing services

 

Common stock (250,000 shares)

 

 

 

 

5/29/2007

 

 

250

 

 

250

 

$

1.00

(5)

 

 

 

Summit Business Media, LLCv

 

Business media consulting services

 

Junior secured loan ($10,000 par due 11/2013)

 

9.47%
(Libor + 7.00%/M)

 

 

8/3/2007

 

 

10,000

 

 

6,000

 

$

0.60

(3)

 

 

 

VSS-Tranzact Holdings, LLC(6)

 

Management consulting services

 

Common membership interest (8.51% interest)

 

 

 

 

10/26/2007

 

 

10,000

 

 

6,000

 

 

 

(5)

 

 

 
                                         
                        156,091     132,085           12.06 %
                                         

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Apogee Retail, LLC   For-profit thrift retailer   Senior secured revolving loan ($390 par due 3/2012)   7.25%
(Base Rate + 4.00%/D)
    3/27/2007     390     390   $ 1.00        
        Senior secured loan ($10,960 par due 11/2012)   12.00% Cash,
4.00% PIK
    5/28/2008     10,960     10,960   $ 1.00 (4)      
        Senior secured loan ($2,307 par due 3/2012)   8.71%
(Libor + 5.25%/S)
    3/27/2007     2,307     2,053   $ 0.89        
        Senior secured loan ($24,637 par due 3/2012)   8.71%
(Libor + 5.25%/S)
    3/27/2007     24,637     21,927   $ 0.89 (2)      
        Senior secured loan ($11,790 par due 3/2012)   8.71%
(Libor + 5.25%/S)
    3/27/2007     11,790     10,493   $ 0.89 (3)      
        Senior secured loan ($4,876 par due 3/2012)   7.64%
(Libor + 5.25%/Q)
    3/27/2007     4,876     4,340   $ 0.89        

Dufry AG(8)

 

Retail newstand operator

 

Common stock (39,056 shares)

 

 

 

 

3/28/2008

 

 

3,000

 

 

1,050

 

$

26.88

(5)

 

 

 

F-86


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

Savers, Inc. and SAI Acquisition Corporation

 

For-profit thrift retailer

 

Senior subordinated note ($6,000 par due 8/2014)

 

10.00% Cash,
2.00% PIK

 

 

8/8/2006

 

 

6,000

 

 

5,700

 

$

0.95

(4)

 

 

 
        Senior subordinated note ($22,000 par due 8/2014)   10.00% Cash,
2.00% PIK
    8/8/2006     22,000     20,900   $ 0.95 (2)(4)      
        Common stock (1,170,182 shares)         8/8/2006     4,500     5,301   $ 4.53 (5)      

Things Remembered, Inc. and TRM Holdings Corporation

 

Personalized gifts retailer

 

Senior secured loan ($4,506 par due 9/2012)

 

7.00%
(Base Rate + 3.75%/D)

 

 

9/28/2006

 

 

4,506

 

 

3,470

 

$

0.77

(3)

 

 

 
        Senior secured loan ($25,192 par due 9/2012)   15.00%
(Base Rate + 9.75%/D)
    9/28/2006     25,189     18,651   $ 0.74 (2)      
        Senior secured loan ($3,095 par due 9/2012)   15.00%
(Base Rate + 9.75%/D)
    9/28/2006     3,094     2,291   $ 0.74        
        Senior secured loan ($7,273 par due 9/2012)   15.00%
(Base Rate + 9.75%/D)
    9/28/2006     7,273     5,385   $ 0.74 (3)      
        Preferred stock (80 shares)         9/28/2006     1,800       $ (5)      
        Common stock (800 shares)         9/28/2006     200       $ (5)      
                                         
                        132,522     112,911           10.31 %
                                         

Environmental Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
AWTP, LLC   Water treatment services   Junior secured loan ($402 par due 12/2012)   8.97%
(Libor + 7.50% Cash,
1.00% PIK/Q)
    12/23/2005     402     322   $ 0.80 (4)      
        Junior secured loan ($3,018 par due 12/2012)   8.97%
(Libor + 7.50% Cash,
1.00% PIK/Q)
    12/23/2005     3,018     2,414   $ 0.80 (3)(4)      
        Junior secured loan ($805 par due 12/2012)   11.48%
(Libor + 7.50% Cash,
1.00% PIK/A)
    12/23/2005     805     644   $ 0.80 (4)      
        Junior secured loan ($6,036 par due 12/2012)   11.48%
(Libor + 7.50% Cash,
1.00% PIK/A)
    12/23/2005     6,036     4,829   $ 0.80 (3)(4)      
        Junior secured loan ($402 par due 12/2012)   9.35%
(Libor + 7.50% Cash,
1.00% PIK/A)
    12/23/2005     402     322   $ 0.80 (4)      
        Junior secured loan ($3,018 par due 12/2012)   9.35%
(Libor + 7.50% Cash,
1.00% PIK/A)
    12/23/2005     3,018     2,414   $ 0.80 (3)(4)      

Mactec, Inc.

 

Engineering and environmental services

 

Class B-4 stock (16 shares)

 

 

 

 

11/3/2004

 

 


 

 


 

$

27.00

(5)

 

 

 
        Class C stock (5,556 shares)         11/3/2004         150   $ 27.00 (5)      

Sigma International Group, Inc.

 

Water treatment parts manufacturer

 

Junior secured loan ($1,833 par due 10/2013)

 

9.55%
(Libor + 7.50%/Q)

 

 

10/11/2007

 

 

1,833

 

 

1,558

 

$

0.85

(2)

 

 

 
        Junior secured loan ($4,000 par due 10/2013)   9.55%
(Libor + 7.50%/Q)
    10/11/2007     4,000     3,400   $ 0.85 (3)      
        Junior secured loan ($2,750 par due 10/2013)   7.97%
(Libor + 7.50/M)
    11/1/2007     2,750     2,338   $ 0.85 (2)      
        Junior secured loan ($6,000 par due 10/2013)   7.97%
(Libor + 7.50/M)
    11/1/2007     6,000     5,100   $ 0.85 (3)      
        Junior secured loan ($917 par due 10/2013)   9.40%
(Libor + 7.50%/M)
    11/6/2007     917     779   $ 0.85 (2)      

F-87


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Junior secured loan ($2,000 par due 10/2013)   9.40%
(Libor + 7.50%/M)
    11/6/2007     2,000     1,700   $ 0.85 (3)      

Waste Pro USA, Inc.

 

Waste management services

 

Senior subordinated loan ($25,000 par due 11/2013)

 

11.50%

 

 

11/9/2006

 

 

25,000

 

 

25,000

 

$

1.00

(2)

 

 

 
        Preferred stock (15,000 shares)   10.00% PIK     11/9/2006     15,000     15,000   $ 1,000.00 (4)      
        Warrants to purchase 682,671 shares         11/9/2006         6,827   $ 10.00 (5)      

Wastequip, Inc.(6)

 

Waste management equipment manufacturer

 

Senior subordinated loan ($12,990 par due 2/2015)

 

10.00% Cash,
2.00% PIK

 

 

2/5/2007

 

 

12,990

 

 

7,715

 

$

0.59

(4)

 

 

 
        Common stock (13,889 shares)         2/2/2007     1,389     131   $ 9.43 (5)      
                                         
                        85,560     80,643           7.37 %
                                         

Printing, Publishing and Media

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Canon Communications LLC   Print publications services   Junior secured loan ($11,784 par due 11/2011)   13.00%
(Base Rate + 9.75%/D)
    5/25/2005     11,784     11,313   $ 0.96 (2)(15)      
        Junior secured loan ($12,009 par due 11/2011)   13.00%
(Base Rate + 9.75%/D)
    5/25/2005     12,009     11,529   $ 0.96 (3)(15)      

Courtside Acquisition Corp.

 

Community newspaper publisher

 

Senior subordinated loan ($34,295 par due 6/2014)

 

17.00% PIK

 

 

6/29/2007

 

 

34,295

 

 

3,430

 

$

0.10

(4)(14)

 

 

 

LVCG Holdings LLC(7)

 

Commercial printer

 

Membership interests (56.53% interest)

 

 

 

 

10/12/2007

 

 

6,600

 

 

8,500

 

 

 

(5)

 

 

 

National Print Group, Inc.

 

Printing management services

 

Senior secured revolving loan ($2,736 par due 3/2012)

 

8.25%
(Base Rate + 5.00%/D)

 

 

3/2/2006

 

 

2,736

 

 

2,462

 

$

0.90

(15)

 

 

 
        Senior secured loan ($8,623 par due 3/2012)   7.50%
(Base Rate + 4.25%/D)
    3/2/2006     8,623     7,761   $ 0.90 (3)(15)      
        Preferred stock (9,344 shares)         3/2/2006     2,000       $ (5)      

The Teaching Company, LLC and The Teaching Company Holdings, Inc.(11)

 

Education media provider

 

Senior secured loan ($18,000 par due 9/2012)

 

11.70%

 

 

9/29/2006

 

 

18,000

 

 

17,100

 

$

0.95

(2)

 

 

 
        Senior secured loan ($10,000 par due 9/2012)   11.70%     9/29/2006     10,000     9,500   $ 0.95 (3)      
        Preferred stock (29,969 shares)         9/29/2006     2,997     3,996   $ 133.34 (5)      
        Common stock (15,393 shares)         9/29/2006     3     4   $ 0.26 (5)      
                                         
                        109,047     75,595           6.90 %
                                         

Manufacturing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Arrow Group Industries, Inc.   Residential and outdoor shed manufacturer   Senior secured loan ($5,616 par due 4/2010)   6.46%
(Libor + 5.00%/Q)
    3/28/2005     5,647     5,372   $ 0.96 (3)(15)      

Emerald Performance Materials, LLC

 

Polymers and performance materials manufacturer

 

Senior secured loan ($9,018 par due 5/2011)

 

8.25%
(Libor + 4.25%/A)

 

 

5/16/2006

 

 

9,018

 

 

8,567

 

$

0.95

(3)(15)

 

 

 
        Senior secured loan ($626 par due 5/2011)   6.75%
(Base Rate + 3.50%/D)
    5/16/2006     626     595   $ 0.95 (3)(15)      

F-88


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Senior secured loan ($536 par due 5/2011)   8.25%
(Libor + 4.25%/A)
    5/16/2006     536     509   $ 0.95 (3)(15)      
        Senior secured loan ($1,523 par due 5/2011)   10.00%
(Libor + 6.00%/A)
    5/16/2006     1,523     1,447   $ 0.95 (3)(15)      
        Senior secured loan ($81 par due 5/2011)   10.00%
(Libor + 6.00%/A)
    5/16/2006     81     77   $ 0.95 (3)(15)      
        Senior secured loan ($4,537 par due 5/2011)   10.00% Cash,
3.00% PIK
    5/16/2006     4,546     4,319   $ 0.95 (2)(4)      
        Senior secured loan ($241 par due 5/2011)   10.00% Cash,
3.00% PIK
    5/16/2006     241     229   $ 0.95 (2)(4)      

Qualitor, Inc.

 

Automotive aftermarket components supplier

 

Senior secured loan ($1,756 par due 12/2011)

 

5.46%
(Libor + 4.00%/Q)

 

 

12/29/2004

 

 

1,752

 

 

1,664

 

$

0.95

(3)

 

 

 
        Senior secured loan ($5 par due 12/2011)               5     5   $ 1.00 (3)      
        Junior secured loan ($5,000 par due 6/2012)   8.46%
(Libor + 7.00%/Q)
    12/29/2004     5,000     4,750   $ 0.95 (3)      

Reflexite Corporation(7)

 

Developer and manufacturer of high-visibility reflective products

 

Senior subordinated loan ($10,253 par due 2/2015)

 

11.00% Cash,
3.00% PIK

 

 

2/28/2008

 

 

10,253

 

 

10,253

 

$

1.00

(4)

 

 

 
        Common stock (1,821,860 shares)         3/28/2006     27,435     35,500   $ 19.49 (5)      

Saw Mill PCG Partners LLC

 

Precision components manufacturer

 

Common units (1,000 units)

 

 

 

 

2/2/2007

 

 

1,000

 

 


 

$


(5)

 

 

 

UL Holding Co., LLC

 

Petroleum product manufacturer

 

Common units (50,000 units)

 

 

 

 

4/25/2008

 

 

500

 

 

750

 

$

15.00

(5)

 

 

 
        Common units (50,000 units)         4/25/2008           $ (5)      

Universal Trailer Corporation(6)

 

Livestock and specialty trailer manufacturer

 

Common stock (74,920 shares)

 

 

 

 

10/8/2004

 

 

7,930

 

 


 

$


(5)

 

 

 
                                         
                        76,093     74,037           6.76 %
                                         

Aerospace & Defense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
AP Global Holdings, Inc.   Safety and security equipment manufacturer   Senior secured loan ($7,898 par due 10/2013)   4.97%
(Libor + 4.50%/M)
    11/8/2007     7,799     7,121   $ 0.90 (3)      

ILC Industries, Inc.

 

Industrial products provider

 

Junior secured loan ($12,000 par due 8/2012)

 

11.50%

 

 

6/27/2006

 

 

12,000

 

 

12,000

 

$

1.00

(3)

 

 

 

Thermal Solutions LLC and TSI Group, Inc.

 

Thermal management and electronics packaging manufacturer

 

Senior secured loan ($871 par due 3/2011)

 

3.92%
(Libor + 3.50%/M)

 

 

3/28/2005

 

 

871

 

 

836

 

$

0.96

(3)

 

 

 
        Senior secured loan ($2,765 par due 3/2012)   4.42%
(Libor + 4.00%/M)
    3/28/2005     2,765     2,461   $ 0.89 (3)      
        Senior subordinated notes ($2,117 par due 9/2012)   11.50% Cash,
2.75% PIK
    3/28/2005     2,117     2,043   $ 0.97 (4)      

F-89


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Senior subordinated notes ($3,342 par due 9/2012)   11.50% Cash,
2.75% PIK
    3/28/2005     3,342     3,225   $ 0.96 (2)(4)      
        Senior subordinated notes ($2,679 par due 3/2013)   11.50% Cash,
2.50% PIK
    3/21/2006     2,679     2,599   $ 0.97 (2)(4)      
        Preferred stock (71,552 shares)         3/28/2005     716     716   $ 10.00 (5)      
        Common stock (1,460,246 shares)         3/28/2005     15     15   $ 0.01 (5)      

Wyle Laboratories, Inc. and Wyle Holdings, Inc.

 

Provider of specialized engineering, scientific and technical services

 

Junior secured loan ($16,000 par due 7/2014)

 

8.96%
(Libor + 7.50%/Q)

 

 

1/17/2008

 

 

16,000

 

 

15,200

 

$

0.95

 

 

 

 
        Junior secured loan ($12,000 par due 7/2014)   8.96%
(Libor + 7.50%/Q)
    1/17/2008     12,000     11,400   $ 0.95 (3)      
        Common stock (246,279 shares)         1/17/2008     2,100     1,680   $ 6.82 (5)      
                                         
                        62,404     59,296           5.42 %
                                         

Consumer Products—Non-Durable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Innovative Brands, LLC   Consumer products and personal care manufacturer   Senior secured loan ($9,901 par due 9/2011)   14.50%     10/12/2006     9,901     9,901   $ 1.00        
        Senior secured loan ($9,139 par due 9/2011)   14.50%     10/12/2006     9,139     9,139   $ 1.00 (3)      

Making Memories Wholesale, Inc.(6)

 

Scrapbooking branded products manufacturer

 

Senior secured loan ($21,509 par due 3/2011)

 

10.00%
(Base Rate + 5.00%/D)

 

 

5/5/2005

 

 

11,953

 

 

12,087

 

$

0.56

(14)

 

 

 
        Senior subordinated loan ($10,465 par due 5/2012)   12.00% Cash,
4.00% PIK
    5/5/2005     10,465       $ (4)(14)      
        Preferred stock (4,259 shares)         5/5/2005     3,759       $ (5)      

Shoes for Crews, LLC

 

Safety footwear and slip-related mat manufacturer

 

Senior secured revolving loan ($1,000 par due 7/2010)

 

5.25%
(Base Rate + 2.00%/D)

 

 

10/8/2004

 

 

1,000

 

 

1,000

 

$

1.00

 

 

 

 
        Senior secured loan ($572 par due 7/2010)   5.31%
(Libor + 3.50%/S)
    10/8/2004     572     572   $ 1.00 (3)      
        Senior secured loan ($88 par due 7/2010)   4.96%
(Libor + 3.50%/Q)
    10/8/2004     88     88   $ 1.00 (3)      

The Thymes, LLC(7)

 

Cosmetic products manufacturer

 

Preferred stock (6,283 shares)

 

8.00% PIK

 

 

6/21/2007

 

 

6,283

 

 

5,026

 

$

799.94

(4)

 

 

 
        Common stock (5,400 shares)         6/21/2007           $ (5)      

Wear Me Apparel, LLC(6)

 

Clothing manufacturer

 

Senior subordinated notes ($23,985 par due 4/2013)

 

17.50% PIK

 

 

4/2/2007

 

 

24,035

 

 

12,055

 

$

0.50

(4)(14)

 

 

 
        Common stock (10,000 shares)         4/2/2007     10,000       $ (5)      
                                         
                        87,195     49,868           4.55 %
                                         

F-90


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

Telecommunications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
American Broadband Communications, LLC and American Broadband Holding Company   Broadband communication services   Senior subordinated loan ($32,048 par due 11/2014)   10.00% Cash,
6.00% PIK
    2/8/2008     32,048     32,048   $ 1.00 (4)      
        Senior subordinated loan ($8,087 par due 11/2014)   10.00% Cash,
6.00% PIK
    11/7/2007     8,087     8,087   $ 1.00 (4)      
        Warrants to purchase 170 shares         11/7/2007           $ (5)      
                                         
                        40,135     40,135           3.67 %
                                         

Cargo Transport

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
The Kenan Advantage Group, Inc.   Fuel transportation provider   Senior subordinated notes ($25,266 par due 12/2013)   9.50% Cash,
3.50% PIK
    12/15/2005     25,260     24,000   $ 0.95 (2)(4)      
        Senior secured loan ($2,426 par due 12/2011)   4.46%
(Libor + 3.00%/Q)
    12/15/2005     2,425     2,183   $ 0.90 (3)      
        Preferred stock (10,984 shares)   8.00% PIK     12/15/2005     1,371     1,732   $ 157.68 (4)(5)      
        Common stock (30,575 shares)         12/15/2005     31     41   $ 1.34 (5)      
                                         
                        29,087     27,956           2.55 %
                                         

Containers—Packaging

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Industrial Container Services, LLC(6)   Industrial container manufacturer, reconditioner and servicer   Senior secured revolving loan ($1,198 par due 9/2011)   5.75%
(Base Rate + 2.50%/D)
    6/21/2006     1,198     1,198   $ 1.00        
        Senior secured revolving loan ($1,239 par due 9/2011)   4.47%
(Libor + 4.00%/M)
    6/21/2006     1,239     1,239   $ 1.00        
        Senior secured loan ($42 par due 9/2011)   4.47%
(Libor + 4.00%/B)
    9/30/2005     42     42   $ 1.00 (2)      
        Senior secured loan ($516 par due 9/2011)   4.46%
(Libor + 4.00%/M)
    6/21/2006     516     516   $ 1.00 (2)      
        Senior secured loan ($7,902 par due 9/2011)   4.46%
(Libor + 4.00%/M)
    6/21/2006     7,902     7,902   $ 1.00 (3)      
        Senior secured loan ($85 par due 9/2011)   5.20%
(Libor + 4.00%/M)
    6/21/2006     85     85   $ 1.00 (2)      
        Senior secured loan ($1,309 par due 9/2011)   5.20%
(Libor + 4.00%/M)
    6/21/2006     1,309     1,309   $ 1.00 (3)      
        Senior secured loan ($263 par due 9/2011)   5.20%
(Libor + 4.00%/M)
    6/21/2006     263     263   $ 1.00 (2)      
        Senior secured loan ($4,028 par due 9/2011)   5.20%
(Libor + 4.00%/M)
    6/21/2006     4,028     4,028   $ 1.00 (3)      
        Senior secured loan ($105 par due 9/2011)   5.88%
(Libor + 4.00%/M)
    6/21/2006     105     105   $ 1.00 (2)      
        Senior secured loan ($1,611 par due 9/2011)   5.88%
(Libor + 4.00%/M)
    6/21/2006     1,611     1,611   $ 1.00 (3)      
        Common stock (1,800,000 shares)         9/29/2005     1,800     9,100   $ 5.06 (5)      
                                         
                        20,098     27,398           2.50 %
                                         

F-91


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 

Computers and Electronics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
RedPrairie Corporation   Software manufacturer   Junior secured loan ($3,300 par due 1/2013)   9.21%
(Libor + 6.50%/Q)
    7/13/2006     3,300     2,970   $ 0.90 (2)      
        Junior secured loan ($12,000 par due 1/2013)   9.21%
(Libor + 6.50%/Q)
    7/13/2006     12,000     10,800   $ 0.90 (3)      

X-rite, Incorporated

 

Color management solutions provider

 

Junior secured loan ($3,098 par due 7/2013)

 

13.63%
(Libor + 10.38%/D)

 

 

7/6/2006

 

 

3,098

 

 

3,098

 

$

1.00

(15)

 

 

 
        Junior secured loan ($7,744 par due 7/2013)   13.63%
(Libor + 10.38%/D)
    7/6/2006     7,744     7,744   $ 1.00 (3)(15)      
                                         
                        26,142     24,612           2.25 %
                                         

Health Clubs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Athletic Club Holdings, Inc.(13)   Premier health club operator   Senior secured loan ($1,000 par due 10/2013)   4.97%
(Libor + 4.5%/M)
    10/11/2007     1,000     880   $ 0.88        
        Senior secured loan ($1,750 par due 10/2013)   8.88%
(Libor + 4.5%/S)
    10/11/2007     1,750     1,540   $ 0.88        
        Senior secured loan ($12,486 par due 10/2013)   5.01%
(Libor + 4.5%/M)
    10/11/2007     12,486     10,988   $ 0.88 (2)      
        Senior secured loan ($11,487 par due 10/2013)   5.01%
(Libor + 4.5%/M)
    10/11/2007     11,487     10,109   $ 0.88 (3)      
        Senior secured loan ($14 par due 10/2013)   6.75%
(Base Rate + 3.50/D)
    10/11/2007     14     12   $ 0.86 (2)      
        Senior secured loan ($13 par due 10/2013)   6.75%
(Base Rate + 3.50/D)
    10/11/2007     13     11   $ 0.85 (3)      
                                         
                        26,750     23,540           2.07 %
                                         

Grocery

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Planet Organic Health Corp.(8)   Organic grocery store operator   Junior secured loan ($860 par due 7/2014)   6.01%
(Libor + 5.50%/M)
    7/3/2007     860     817   $ 0.95        
        Junior secured loan ($10,250 par due 7/2014)   6.01%
(Libor + 5.50%/M)
    7/3/2007     10,250     9,738   $ 0.95 (3)      
        Senior subordinated loan ($10,900 par due 7/2012)   11.00% Cash,
2.00% PIK
    7/3/2007     10,900     9,845   $ 0.90 (2)(4)      
                                         
                        22,010     20,400           1.86 %
                                         

Consumer Products—Durable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Direct Buy Holdings, Inc. and Direct Buy Investors, LP(6)   Membership-based buying club franchisor and operator   Senior secured loan ($2,281 par due 11/2012)   4.97%
(Libor + 4.50%/B)
    12/14/2007     2,189     1,861   $ 0.82        
        Partnership interests (19.31% interest)         11/30/2007     10,000     6,500       (5)      
                                         
                        12,189     8,361           0.76 %
                                         

Housing—Building Materials

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
HB&G Building Products   Synthetic and wood product manufacturer   Senior subordinated loan ($8,956 par due 3/2011)   13.00% Cash,
6.00% PIK
    10/8/2004     8,966     2,251   $ 0.25 (2)(4)(14)      
        Common stock (2,743 shares)         10/8/2004     753       $ (5)      

F-92


Company(1)
  Industry   Investment   Interest(10)   Initial
Acquisition
Date
  Amortized Cost   Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
        Warrants to purchase 4,464 shares         10/8/2004     653       $ (5)      
                                         
                        10,372     2,251           0.00 %
                                         
Total                     $ 2,267,593   $ 1,972,977              
                                         

(1)
Other than our investments in R3 Education, Inc., HCP Acquisition Holdings, LLC, Ivy Hill Middle Market Credit Fund, Ltd., LVCG Holdings LLC, Reflexite Corporation and The Thymes, LLC, we do not "Control" any of our portfolio companies, as defined in the Investment Company Act. In general, under the Investment Company Act, we would "Control" a portfolio company if we owned more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. All of our portfolio company investments are subject to legal restrictions on sales which as of December 31, 2008 represented 180% of the Company's net assets.

(2)
These assets are owned by the Company's wholly owned subsidiary Ares Capital CP, are pledged as collateral for the CP Funding Facility and, as a result, are not directly available to the creditors of the Company to satisfy any obligations of the Company other than Ares Capital CP's obligations under the CP Funding Facility (see Note 7 to the consolidated financial statements).

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

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

(5)
Non-income producing at December 31, 2008.

(6)
As defined in the Investment Company Act, we are an "Affiliate" of this portfolio company because we own 5% or more of the portfolio company's outstanding voting securities or we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions during the period for the year ended December 31, 2008 in which the issuer was an Affiliate (but not a portfolio company that we "Control") are as follows (in thousands):

 
Company
  Purchases   Redemptions
(cost)
  Sales
(cost)
  Interest
income
  Capital
structuring
service
fees
  Dividend
income
  Other
income
  Net
realized
gains
(losses)
  Net
unrealized
gains
(losses)
 
 

Apple & Eve, LLC and US Juice Partners, LLC

  $ 11,500   $ 10,814   $   $ 4,634   $   $   $ 43   $ 40   $ (12,383 )
 

Carador, PLC

  $   $   $   $   $   $ 825   $   $   $ (3,479 )
 

Campus Management Corp. and Campus Management Acquisition Corp.

  $ 69,193   $ 1,768   $   $ 5,367   $ 1,540   $   $ 112   $   $ 3,048  
 

CT Technologies Intermediate Holdings, Inc. and CT Technologies Holdings, LLC

  $ 4,719   $ 56,822   $   $ 2,573   $   $   $ 340   $ 100   $ 1,382  
 

Daily Candy, Inc.

  $   $ 11,872   $ 10,806   $ 735   $   $   $   $ 1,208   $  
 

Direct Buy Holdings, Inc. and Direct Buy Investors LP

  $   $ 219   $   $ 192   $   $   $   $ 9   $ (3,828 )
 

Firstlight Financial Corporation

  $   $   $   $ 5,854   $   $   $ 750   $   $ (36,991 )
 

Imperial Capital Group, LLC

  $ 584   $   $   $   $   $   $   $   $  
 

Industrial Container Services, LLC

  $ 6,939   $ 16,677   $   $ 1,710   $   $   $ 120   $   $ 4,100  
 

Investor Group Services, LLC

  $ 1,250   $ 1,500   $   $ 24   $   $   $ 55   $   $ 500  
 

Making Memories Wholesale, Inc

  $ 5,942   $ 1,114   $   $ 199   $   $   $   $   $ (6,668 )
 

Pillar Holdings LLC and PHL Holding Co.

  $ 15,807   $ 600   $ 31,865   $ 3,404   $ 281   $   $ 167   $   $ 1,500  
 

Primis Marketing Group, Inc. and Primis Holdings, LLC

  $   $   $   $   $   $   $   $   $ (7,565 )
 

Universal Trailer Corporation

  $   $   $   $   $   $   $   $   $ (700 )
 

VSS-Tranzact Holdings, LLC

  $   $   $   $   $   $   $   $   $ (4,000 )
 

Wastequip, Inc.

  $   $   $   $ 1,424   $   $   $   $   $ (3,318 )
 

Wear Me Apparel, LLC

  $   $   $   $ 2,416   $   $   $ 13   $   $ (14,055 )
(7)
As defined in the Investment Company Act, we are an "Affiliate" of this portfolio company because we own 5% or more of the portfolio company's outstanding voting securities or we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). In addition, as defined in the Investment Company Act, we "Control" this portfolio company because we own more than 25% of the portfolio company's outstanding voting securities or we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions during the period for the year ended December 31, 2008 in which the issuer was both an Affiliate and a portfolio company that we Control are as follows (in thousands):

 
Company
  Purchases   Redemptions
(cost)
  Sales
(cost)
  Interest
income
  Capital
structuring
service
fees
  Dividend
income
  Other
income
  Net
realized
gains
(losses)
  Net
unrealized
gains
(losses)
 
 

HCP Acquisition Holdings, LLC

  $ 8,567   $   $   $   $   $   $   $   $ (2,067 )
 

Ivy Hill Middle Market Credit Fund, Ltd.

  $   $   $   $ 5,427   $   $   $ 1,528   $   $ (5,600 )
 

LVCG Holdings, LLC

  $   $   $   $   $   $   $ 100   $   $ (1,900 )
 

R3 Education, Inc.

  $ 62,600   $ 69,089   $   $ 3,521   $ 2,900   $   $ 65   $   $ 4,393  
 

Reflexite Corporation

  $ 10,239   $   $   $ 928   $ 100   $   $ 10   $   $ (19,166 )
 

The Thymes, LLC

  $   $   $ 1,450   $ 544   $   $ 133   $   $   $ (1,257 )
(8)
Non-U.S. company or principal place of business outside the U.S. and as a result is not a qualifying asset under Section 55(a) of the Investment Company Act. Under the Investment Company Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.

F-93


(9)
Non-registered investment company.

(10)
A majority of the variable rate loans to our portfolio companies bear interest at a rate that may be determined by reference to either Libor or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower's option, which reset annually (A), semi-annually (S), quarterly (Q), bi-monthly (B), monthly (M) or daily (D). For each such loan, we have provided the interest rate in effect at December 31, 2008.

(11)
In addition to the interest earned based on the stated interest rate of this security, we are entitled to receive an additional interest amount of 2.50% on $22.2 million aggregate principal amount of the portfolio company's senior term debt previously syndicated by us.

(12)
Principal amount denominated in Canadian dollars has been translated into U.S. dollars (see Note 2 to the consolidated financial statements).

(13)
In addition to the interest earned based on the stated interest rate of this security, we are entitled to receive an additional interest amount of 2.50% on $25.0 million aggregate principal amount of the portfolio company's senior term debt previously syndicated by us.

(14)
Loan was on non-accrual status as of December 31, 2008.

(15)
Loan includes interest rate floor feature.

See accompanying notes to consolidated financial statements.

F-94



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Nine Months Ended September 30, 2009 (unaudited)

(dollar amounts in thousands, except per share data)

 
   
   
   
   
  Accumulated
Undistributed
Net Realized
Gain (Loss) on
Investments,
Foreign Currency
Transactions and
Extinguishment
of Debt
   
   
 
 
   
   
   
   
  Net Unrealized
Gain (Loss) on
Investments
and Foreign
Currency
Transactions
   
 
 
  Common Stock    
  Accumulated
Undistributed
Net Investment
Income (Loss)
   
 
 
  Capital in
Excess of
Par Value
  Total
Stockholders'
Equity
 
 
  Shares   Amount  

Balance at December 31, 2008

    97,152,820   $ 97   $ 1,395,958   $ (7,637 )   (124 ) $ (293,415 ) $ 1,094,879  
 

Issuances of common stock from add-on offerings (net of offering and underwriting costs)

    12,439,908     13     109,073                 109,086  
 

Net increase in stockholders' equity resulting from operations

                95,054     22,311     15,698     133,063  
 

Dividends declared ($1.12 per share)

                (88,581 )   (24,584 )       (113,165 )
 

Purchase of shares in connection with dividend reinvestment plan

                (1,272 )           (1,272 )
                               

Balance at September 30, 2009

    109,592,728   $ 110   $ 1,505,031   $ (2,436 ) $ (2,397 ) $ (277,717 ) $ 1,222,591  
                               

See accompanying notes to consolidated financial statements.

F-95



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(dollar amounts in thousands)

 
  For the nine months ended  
 
  September 30, 2009   September 30, 2008  
 
  (unaudited)
  (unaudited)
 

OPERATING ACTIVITIES:

             
 

Net increase (decrease) in stockholders' equity resulting from operations

  $ 133,063   $ (28,955 )
 

Adjustments to reconcile net increase (decrease) in stockholders' equity resulting from operations:

             
   

Realized gain on extinguishment of debt

    (26,543 )    
   

Net realized losses (gains) from investments

    4,232     (4,796 )
   

Net unrealized losses (gains) from investments and foreign currency transactions

    (15,698 )   128,605  
   

Net accretion of discount on securities

    (1,640 )   (1,217 )
   

Increase in accrued payment-in-kind dividends and interest

    (33,021 )   (22,614 )
   

Amortization of debt issuance costs

    3,251     1,237  
   

Depreciation

    505     338  
   

Proceeds from sale and redemption of investments

    267,381     393,628  
   

Purchase of investments

    (218,843 )   (814,694 )
   

Changes in operating assets and liabilities:

             
     

Interest receivable

    1,227     8,661  
     

Other assets

    (1,052 )   (1,926 )
     

Management and incentive fees payable

    23,538     12,142  
     

Accounts payable and accrued expenses

    4,845     1,648  
     

Interest and facility fees payable

    (1,152 )   (940 )
           
   

Net cash provided by (used in) operating activities

    140,093     (328,883 )
           

FINANCING ACTIVITIES:

             
   

Net proceeds from issuance of common stock

    109,086     259,801  
   

Borrowings on debt

    246,700     685,000  
   

Repayments on credit facility payable

    (362,678 )   (463,500 )
   

Credit facility financing costs

    (6,010 )   (2,936 )
   

Dividends paid in cash

    (155,105 )   (109,215 )
           
     

Net cash (used in) provided by financing activities

    (168,007 )   369,150  
           

CHANGE IN CASH AND CASH EQUIVALENTS

    (27,914 )   40,267  

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

    89,383     21,142  
           

CASH AND CASH EQUIVALENTS, END OF PERIOD

  $ 61,469   $ 61,409  
           

Supplemental Information:

             
   

Interest paid during the period

  $ 15,053   $ 25,685  
   

Taxes paid during the period

  $ 660   $ 1,601  
   

Dividends declared during the period

  $ 113,165   $ 112,137  

See accompanying notes to consolidated financial statements.

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ARES CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2009 (unaudited)

(dollar amounts in thousands, except per share data and as otherwise indicated)

1.     ORGANIZATION

              Ares Capital Corporation (the "Company" or "ARCC" or "we") is a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland. We have elected to be regulated as a business development company under the Investment Company Act of 1940 (the "Investment Company 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 elected to be treated as a regulated investment company, or a "RIC", under subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") and operates in a manner so as to qualify for the tax treatment applicable to RICs. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component like warrants, 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 international investment management firm. Ares Operations LLC ("Ares Administration" or the "administrator"), 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 in the United States ("GAAP") for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. 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, 2009.

2.     SIGNIFICANT ACCOUNTING POLICIES

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

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

F-97


              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.

              Investment transactions are recorded on the trade date. Realized gains or losses are computed using the specific identification method. Investments for which market quotations are readily available are typically valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available (i.e., substantially all of our investments) are valued at fair value as determined in good faith by our board of directors, based on the input of our management and audit committee and independent valuation firms that have been engaged at the direction of the board to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing 12 month period, and under a valuation policy and a consistently applied valuation process. The valuation process is conducted at the end of each fiscal quarter, with approximately 50% (based on value) of our valuations of portfolio companies without readily available market quotations subject to review by an independent valuation firm each quarter.

              As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company's debt and equity), the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison of the portfolio company's securities to publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation.

              Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors, based on the input of our management and audit committee and independent valuation firms under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which we have recorded it.

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

F-98


              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:

              Effective January 1, 2008, the Company adopted Accounting Standards Codification ("ASC") 820-10 (previously Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157")), which expands the application of fair value accounting for investments (see Note 8 to the consolidated financial statements).

              Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Discounts and premiums on securities purchased are accreted/amortized over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums.

              Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management's judgment, are likely to remain current. The Company may make exceptions to this if the loan has sufficient collateral value and is in the process of collection. As of September 30, 2009, seven loans or 5.3% of total investments at amortized cost (or 1.7% at fair value), were placed on non-accrual status. As of December 31, 2008, six loans or 4.4% of total investments at amortized cost (or 1.6% at fair value), were placed on non-accrual status.

              The Company has loans in its portfolio that contain payment-in-kind ("PIK") provisions. 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, 2009, $10,825 and $33,021, respectively, in PIK income was recorded. For the three and nine months ended September 30, 2008, $9,735 and $22,614, respectively, in PIK income was recorded.

F-99


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

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

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

              Results of operations based on changes in foreign exchange rates are separately disclosed in the statement of operations. Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. government securities. These risks include, but are not limited to, currency fluctuation and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices more volatile than those of comparable U.S. companies or U.S. government securities.

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

              The Company's offering costs, excluding underwriters fees, are charged against the proceeds from equity offerings when received. For the nine months ended September 30, 2009, and September 30, 2008, the Company incurred approximately $806 and $1,414 of offering costs, respectively.

F-100


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

              The Company has elected to be treated as a RIC under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. The Company, among other things, has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal income taxes.

              Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three months ended September 30, 2009, no amount was recorded for U.S. Federal excise tax. For the nine months ended September 30, 2009, a net benefit of $30 was recorded for U.S. Federal excise tax. For the three months ended September 30, 2008, the Company recorded a benefit of $135 for U.S. Federal excise tax. For the nine months ended September 30, 2008, the Company recorded a benefit of approximately $434 for U.S. Federal excise tax.

              Certain of our wholly owned subsidiaries are subject to U.S. Federal and state income taxes. For the three and nine months ended September 30, 2009, we recorded tax expenses of approximately $454 and $593, respectively, for these subsidiaries. For the three and nine months ended September 30, 2008, we recorded tax provisions of approximately $17 and $132, respectively, for these subsidiaries.

              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 investment.

              We have adopted a dividend reinvestment plan that provides for reinvestment of any distributions we declare in cash on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not "opted out" of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving the cash dividend. While we generally use primarily newly issued shares to implement the plan (especially if our shares are trading at a premium to net asset value), we may purchase shares in the open market in connection with our obligations under the plan. In particular, if our shares are trading at a significant enough discount to net asset value and we are otherwise permitted under applicable law to purchase such shares, we intend to purchase shares in the open market in connection with our obligations under our dividend reinvestment plan.

F-101


              The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of actual and contingent assets and liabilities at the date of the financial statements and the reported amounts of income or loss and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation of investments.

              In June 2009, the Financial Accounting Standards Board ("FASB") issued ASC 860 (previously SFAS No. 166, Accounting for Transfer of Financial Assets, which amends the guidance in SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities). It eliminates the qualifying special-purpose entities ("QSPEs") concept, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the derecognition criteria, revises how retained interests are initially measured, and removes the guaranteed mortgage securitization recharacterization provisions. ASC 860 requires additional year-end and interim disclosures for public and nonpublic companies that are similar to the disclosures required by FSP FAS 140-4 and FIN 46(R)-8. ASC 860 is effective as of the beginning of a company's first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. ASC 860's disclosure requirements must be applied to transfers that occurred before and after its effective date. Early adoption is prohibited. We are currently evaluating the effect that the provisions of ASC 860 may have on our financial condition and results of operations.

              In June 2009, FASB issued ASC 810 (previously SFAS No. 167, Amendments to FASB Interpretation No. 46(R), which amends the guidance in FASB Interpretation No. ("FIN") 46(R), Consolidation of Variable Interest Entities). It requires reporting entities to evaluate former QSPEs for consolidation, changes the approach to determining the primary beneficiary of a variable interest entity (a "VIE") from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. ASC 810 requires additional year-end and interim disclosures for public and non-public companies that are similar to the disclosures required by FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. ASC 810 is effective as of the beginning of a company's first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. All QSPE's and entities currently subject to FIN 46(R) will need to be reevaluated under the amended consolidation requirements as of the beginning of the first annual reporting period that begins after November 15, 2009. Early adoption is prohibited. We are currently evaluating the effect that the provisions of ASC 810 may have on our financial condition and results of operations.

              In June 2009, FASB issued ASC 2005, (previously SFAS NO. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP")—a replacement of FASB Statement No. 162 ("Codification")). This Codification will become the source of authoritative U.S. GAAP recognized by FASB to be applied by nongovernmental entities. Once the Codification is in effect, all of its content will carry the same level of authority, effectively superseding SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. In other words, the GAAP hierarchy will be modified to include only two levels of GAAP: authoritative and nonauthoritative. The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In order to ease the transition to the Codification, the Company has

F-102



provided the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification.

3.     AGREEMENTS

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

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

              Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss. For example, if we receive pre-incentive fee net investment income in excess of the hurdle rate (as defined below) for a quarter, we will pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized and/or unrealized capital losses. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter, is compared to a fixed "hurdle rate" of 2.00% per quarter. If market interest rates rise, we may be able to invest our funds in debt instruments that provide for a higher return, which would increase our pre-incentive fee net investment income and make it easier for our investment adviser to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income. Our pre-incentive fee net investment income used to calculate this part of the incentive fee is also included in the amount of our total assets (other than cash and cash equivalents but including assets purchased with borrowed funds) used to calculate the 1.5% base management fee.

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

F-103


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

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

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

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

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

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

              For the three and nine months ended September 30, 2009, we incurred $7,508 and $22,502, respectively, in base management fees and $8,227 and $23,764, respectively, in incentive management fees related to pre-incentive fee net investment income. For the three and nine months ended September 30, 2009, we accrued no incentive management fees related to realized capital gains. As of September 30, 2009, $56,527 was unpaid and included in management and incentive fees payable in the accompanying consolidated balance sheet. Included in this $56,527 was $49,019 in incentive management fees related to the fifteen months ended September 30, 2009 that have been deferred pursuant to the investment advisory and management agreement.

              For the three and nine months ended September 30, 2008, we incurred $7,963 and $22,729, respectively, in base management fees and $8,205 and $23,713, respectively, in incentive management

F-104



fees related to pre-incentive fee net investment income. For the three and nine months ended September 30, 2008, we accrued no incentive management fees related to net realized capital gains.

              We are also party to a separate administration agreement, the "administration agreement," with our administrator, Ares Administration. Our board of directors approved the continuation of our administration agreement on May 4, 2009, which extended the term of the agreement until June 1, 2010. Pursuant to the administration agreement, Ares Administration furnishes us with office equipment and clerical, bookkeeping and record keeping services. Under the administration agreement, Ares Administration also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, Ares Administration assists us in determining and publishing our net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. 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. Payments under the administration agreement are equal to an amount based upon our allocable portion of Ares Administration's overhead in performing its obligations under the administration agreement, including our allocable portion of the cost of our officers (including our chief compliance officer, chief financial officer, secretary and treasurer) and their respective staffs. The administration agreement may be terminated by either party without penalty upon 60-days' written notice to the other party.

              For the three and nine months ended September 30, 2009, we incurred $809 and $2,905, respectively, in administrative fees. As of September 30, 2009, $809 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, 2008, we incurred $802 and $1,702, respectively, in administrative fees.

4.     EARNINGS PER SHARE

              The following information sets forth the computations of basic and diluted net increase in stockholders' equity per share resulting from the operations for the three and nine months ended September 30, 2009:

 
  Three months ended
September 30, 2009
  Nine months ended
September 30, 2009
 

Numerator for basic and diluted net increase in stockholders' equity resulting from operations per share:

  $ 63,276   $ 133,063  

Denominator for basic and diluted net increase in stockholders' equity resulting from operations per share:

    102,831,909     99,066,652  

Basic and diluted net increase in stockholders' equity resulting from operations per share:

  $ 0.62   $ 1.34  

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              The following information sets forth the computations of basic and diluted net increase in stockholders' equity per share resulting from operations for the three and nine months ended September 30, 2008:

 
  Three months ended
September 30, 2008
  Nine months ended
September 30, 2008
 

Numerator for basic and diluted net increase in stockholders' equity resulting from operations per share:

  $ (41,393 ) $ (28,955 )

Denominator for basic and diluted net increase in stockholders' equity resulting from operations per share:

    97,152,820     87,152,501  

Basic and diluted net increase in stockholders' equity resulting from operations per share:

  $ (0.43 ) $ (0.33 )

              In accordance with ASC 260-10 (previously SFAS No. 128, Earnings per Share), the weighted average shares of common stock outstanding used in computing basic and diluted net increase in stockholders' equity resulting from operations per share for the three and nine months ended September 30, 2008 has been adjusted retroactively by a factor of 1.02% to recognize the bonus element associated with rights to acquire shares of common stock that we issued to stockholders of record as of March 24, 2008 in connection with a transferable rights offering.

5.     INVESTMENTS

              Under the Investment Company Act, we are required to separately identify non-controlled investments where we own more than 5% of a portfolio company's outstanding voting securities as "affiliated companies." In addition, under the Investment Company Act, we are required to separately identify investments where we own more than 25% of a portfolio company's outstanding voting securities as "control affiliated companies." We had no existing control relationship with any of the portfolio companies identified as "affiliated companies" or "control affiliated companies" prior to making the indicated investment.

              For the three months ended September 30, 2009, the Company funded $49.4 million aggregate principal amount of senior term debt and $16.4 million of investments in equity securities.

              In addition, for the three months ended September 30, 2009, $26.5 million aggregate principal amount of senior term debt was redeemed. Additionally, $17.0 million aggregate principal amount of senior term debt, $43.5 million of senior subordinated debt and $18.9 million of equity were sold.

              As of September 30, 2009, investments and cash and cash equivalents consisted of the following:

 
  Amortized Cost   Fair Value  

Cash and cash equivalents

  $ 61,469   $ 61,469  

Senior term debt

    1,152,456     1,058,988  

Senior subordinated debt

    722,424     606,365  

Equity securities

    314,576     251,458  

Collateralized loan obligations

    55,681     50,913  
           
 

Total

  $ 2,306,606   $ 2,029,193  
           

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              As of December 31, 2008, investments and cash and cash equivalents consisted of the following:

 
  Amortized Cost   Fair Value  

Cash and cash equivalents

  $ 89,383   $ 89,383  

Senior term debt

    1,165,460     1,055,089  

Senior subordinated debt

    737,072     619,491  

Equity securities

    309,061     247,997  

Collateralized loan obligations

    56,000     50,400  
           
 

Total

  $ 2,356,976   $ 2,062,360  
           

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

              The industrial and geographic compositions of our portfolio at fair value at September 30, 2009 and December 31, 2008 were as follows:

 
  September 30, 2009   December 31, 2008  

Industry

             

Health Care

    19.5 %   20.2 %

Education

    9.6     11.1  

Beverage/Food/Tobacco

    8.7     7.8  

Restaurants and Food Services

    8.6     8.1  

Other Services

    7.5     7.4  

Financial

    7.5     7.0  

Business Services

    6.8     6.7  

Retail

    5.8     5.7  

Manufacturing

    4.6     3.8  

Computers/Electronics

    3.3     1.2  

Printing/Publishing/Media

    3.1     3.8  

Aerospace and Defense

    3.1     3.0  

Consumer Products

    3.0     3.0  

Telecommunications

    2.2     2.0  

Environmental Services

    1.9     4.1  

Cargo Transport

    1.5     1.4  

Health Clubs

    1.2     1.2  

Containers/Packaging

    1.1     1.4  

Grocery

    1.0     1.0  

Homebuilding

    0.0     0.1  
           
 

Total

    100.0 %   100.0 %
           

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  September 30, 2009   December 31, 2008  

Geographic Region

             

Mid-Atlantic

    22.5 %   21.0 %

Midwest

    21.9     20.6  

Southeast

    20.6     22.2  

West

    18.2     18.3  

International

    13.1     14.1  

Northeast

    3.7     3.8  
           
 

Total

    100.0 %   100.0 %
           

6.     COMMITMENTS AND CONTINGENCIES

              As of September 30, 2009 and December 31, 2008, the Company had the following commitments to fund various revolving senior secured and subordinated loans:

 
  September 30, 2009   December 31, 2008  

Total revolving commitments

  $ 295,400   $ 419,000  
 

Less: funded commitments

    (90,400 )   (139,600 )
           

Total unfunded commitments

    205,000     279,400  
 

Less: commitments substantially at discretion of the Company

    (10,000 )   (32,400 )
 

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

    (89,000 )   (64,500 )
           

Total net adjusted unfunded revolving commitments

  $ 106,000   $ 182,500  
           

              Of the total commitments as of September 30, 2009, $174,200 extend beyond the maturity date of our Revolving Credit Facility (as defined in Note 7). Additionally, $104,400 of the total commitments, or $6,500 of the net adjusted unfunded commitments, are scheduled to expire in 2009. Included within the total commitments as of September 30, 2009 are commitments to issue up to $24,300 in standby letters of credit through a financial intermediary on behalf of certain portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. As of September 30, 2009, the Company had $21,400 in standby letters of credit issued and outstanding on behalf of the portfolio companies, of which no amounts were recorded as a liability on the balance sheet as they are considered in the valuation of the investments in the portfolio company. Of these letters of credit, $400 expire on January 31, 2010, $200 expire on February 28, 2010, $3,700 expire on March 31, 2010, $8,100 expire on July 31, 2010 and $9,000 expire on September 30, 2010. These letters of credit may be extended under substantially similar terms for additional one-year terms at the Company's option until the Revolving Credit Facility, under which the letters of credit were issued, matures on December 28, 2010.

              As of September 30, 2009 and December 31, 2008, the Company was subject to subscription agreements to fund equity investments in private equity investment partnerships, substantially all at the discretion of the Company, as follows:

 
  September 30, 2009   December 31, 2008  

Total private equity commitments

  $ 428,300   $ 428,300  

Total unfunded private equity commitments

  $ 419,100   $ 423,600  

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7.     BORROWINGS

              In accordance with the Investment Company Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the Investment Company Act, is at least 200% after such borrowing. As of September 30, 2009, our asset coverage for borrowed amounts was 259%.

              Our debt obligations consisted of the following as of September 30, 2009 and December 31, 2008:

 
  September 30, 2009   December 31, 2008  
 
  Outstanding   Total
Available(1)
  Outstanding   Total
Available(1)
 

CP Funding Facility

  $ 223,027   $ 223,027   $ 114,300   $ 350,000  

Revolving Credit Facility

    271,091     525,000     480,486     510,000  

CP Funding II Facility

        200,000          

Debt Securitization

    273,753     273,753     314,000     314,000  
                   

  $ 767,871   $ 1,221,780   $ 908,786   $ 1,174,000  
                   

(1)
Subject to borrowing base and leverage restrictions.

              The weighted average interest rate of all our debt obligations as of September 30, 2009 and December 31, 2008 was 2.02% and 3.03%, respectively.

              In October 2004, we formed Ares Capital CP Funding LLC ("Ares Capital CP"), a wholly owned subsidiary of the Company, through which we established a revolving facility, referred to as the "CP Funding Facility," that, as amended, allowed Ares Capital CP to issue up to $350,000 of variable funding certificates ("VFC"). On May 7, 2009, the Company and Ares Capital CP entered into an amendment that, among other things, converted the CP Funding Facility from a revolving facility to an amortizing facility, extended the maturity from July 21, 2009 to May 7, 2012, reduced the availability from $350,000 to $225,000 (with a reduction in the outstanding balance required by each of December 31, 2010 and December 31, 2011) and decreased the advance rates applicable to certain types of eligible loans. In addition, the interest rate charged on the CP Funding Facility was increased from the commercial paper rate plus 2.50% to the commercial paper, Eurodollar or adjusted Eurodollar rate, as applicable, plus 3.50% and the commitment fee requirement was removed. The Company also paid a renewal fee of 1.25% of the total facility amount, or $2,813. As of September 30, 2009, there was $223,027 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, 2008, there was $114,300 outstanding under the CP Funding Facility.

              The CP Funding Facility is secured by all of the assets held by Ares Capital CP, which as of September 30, 2009 consisted of 36 investments.

              The interest charged on the VFC is payable quarterly and is based on either the commercial paper, Eurodollar or adjusted Eurodollar rate. As of September 30, 2009, the rate in effect was one month LIBOR, which was 0.25%. As of December 31, 2008, the rate in effect was the commercial paper rate which was 2.3271%. For the three and nine months ended September 30, 2009, the average interest rates (i.e. rate in effect plus the spread) were 3.77% and 3.62%, respectively. For the three and nine months ended September 30, 2009, the average outstanding balances were $223,345 and $165,172, respectively. For the three and nine months ended September 30, 2008, the average interest rates

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(i.e. rate in effect plus the spread) were 4.98% and 4.55%, respectively. For the three and nine months ended September 30, 2008, the average outstanding balances were $65,058 and $82,370, respectively.

              For the three and nine months ended September 30, 2009, the interest expense incurred on the CP Funding Facility was $2,151 and $4,632, respectively. For the three and nine months ended September 30, 2008, the interest expense incurred on the CP Funding Facility was $1,105 and $2,429, respectively. Cash paid for interest expense during the nine months ended September 30, 2009 and 2008 was $4,349 and $2,653, respectively.

              Prior to May 7, 2009, the Company was required to pay a commitment fee for any unused portion of the CP Funding Facility equal to 0.5% per annum for any unused portion of the CP Funding Facility. Prior to July 22, 2008, the commitment fee was 0.125% per annum calculated based on an amount equal to $200,000 less the borrowings outstanding under the CP Funding Facility. For the three and nine months ended September 30, 2009, the commitment fees incurred on the CP Funding Facility were $0 and $444, respectively. For the three and nine months ended September 30, 2008, the commitment fees incurred on the CP Funding Facility were $260 and $351, respectively.

              In December 2005, we entered into a senior secured revolving credit facility referred to as "Revolving Credit Facility", under which, as amended, the lenders have agreed to extend credit to the Company in an aggregate principal amount not exceeding $525,000 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, 2009 consisted of 167 investments.

              The Revolving Credit Facility also includes an "accordion" feature that allows us to increase the size of the Revolving Credit Facility to a maximum of $765,000 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, 2009, there was $271,091 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, 2008, there was $480,486 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, 2009, the one, two, three and six month LIBOR were 0.25%, 0.25%, 0.29% and 0.63%, respectively. As of December 31, 2008, the one, two, three and six month LIBOR were 0.44%, 1.10%, 1.43% and 1.75%, respectively. For the three and nine months ended September 30, 2009, the average interest rate was 1.95% and 2.13%, respectively, the average outstanding balance was $328,600 and $414,121, respectively, and the interest expense incurred was $1,605 and $6,617, respectively. For the three and nine months ended September 30, 2008, the average interest rate was 3.77% and 4.28%, respectively, the average outstanding balance was $485,497 and $413,387, respectively, and the interest expense incurred was $2,595 and $6,534, respectively. Cash paid for interest expense during the nine months ended September 30, 2009 and 2008 was $7,944 and $13,963, 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, 2009, the commitment fee incurred was $90 and $133, respectively. For the three and nine months ended September 30, 2008, the commitment fee incurred was $179 and $436, respectively.

              The amount available for borrowing under the Revolving Credit Facility is reduced by any standby letters of credit issued through the Revolving Credit Facility. As of September 30, 2009 and December 31, 2008, the Company had $21,900 and $16,700, respectively, in standby letters of credit issued through the Revolving Credit Facility.

F-110


              As of September 30, 2009, the Company had a non-U.S. borrowing on the Revolving Credit Facility denominated in Canadian dollars. As of September 30, 2009 and December 31, 2008, unrealized appreciation on this borrowing was $1,759 and $3,365, respectively.

              On July 21, 2009, we entered into an agreement with Wachovia Bank N.A. ("Wachovia") to establish a new revolving facility (the "CP Funding II Facility") whereby Wachovia agreed to extend credit to us in an aggregate principal amount not exceeding $200,000 at any one time outstanding. The CP Funding II Facility is scheduled to expire on July 21, 2012 (plus two one-year extension options, subject to mutual consent) and the interest charged on the CP Funding II Facility is based on LIBOR plus 4.00%. As of September 30, 2009, there were no amounts outstanding on the CP Funding II Facility. For the three and nine months ended September 30, 2009, there was no interest expense incurred. We are also required to pay a commitment fee on any unused portion of the CP Funding II Facility of between 0.50% and 2.50% depending on the usage level and paid a structuring fee of 1.5% of the total facility amount, or $3,000. For the three and nine months ended September 30, 2009, the commitment fee incurred was $200.

              In July 2006, through our wholly owned subsidiary, ARCC CLO 2006 LLC ("ARCC CLO"), we completed a $400,000 debt securitization (the "Debt Securitization") and issued approximately $314,000 principal amount of asset-backed notes (including $50,000 of revolving notes, all of which were drawn down as of September 30, 2009) (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, 2009 consolidated balance sheet. We retained approximately $86,000 of aggregate principal amount of certain BBB and non-rated securities in the Debt Securitization (the "Retained Notes"). During the nine months ended September 30, 2009, we repurchased, in several open market transactions, $34,790 of CLO Notes consisting of $14,000 of the Class B and $20,790 of the Class C notes for a total purchase price of $8,247. As a result of these purchases, we recognized a $26,543 gain on the extinguishment of debt and as of September 30, 2009, we held an aggregate principal amount of $120,790 of CLO Notes, in total. The CLO Notes mature on December 20, 2019, and, as of September 30, 2009, there is $273,753 outstanding under the Debt Securitization (excluding the Retained Notes). The blended pricing of the CLO Notes, excluding fees, is approximately 3-month LIBOR plus 27 basis points.

              The classes, amounts, ratings and interest rates (expressed as a spread to 3-month LIBOR) of the CLO Notes are as follows:

Class
  Amount   Rating
(S&P/Moody's)
  LIBOR Spread
(basis points)
 

A-1A

  $ 73,157     AAA/Aaa     25  

A-1A VFN

    48,772 (1)   AAA/Aaa     28  

A-1B

    14,000     AAA/Aa2     37  

A-2A

    72,614     AAA/Aaa     22  

A-2B

    33,000     AAA/Aa1     35  

B

    9,000     AA/A1     43  

C

    23,210     A/Baa3     70  
                   
 

Total

  $ 273,753              
                   

(1)
Revolving class, all of which was drawn as of September 30, 2009.

F-111


              As of September 30, 2009, there were 54 investments securing the notes. The interest charged under the Debt Securitization is based on 3-month LIBOR, which as of September 30, 2009 was 0.29% and as of December 31, 2008 was 1.43%. For the three and nine months ended September 30, 2009, the effective average interest rate was 1.04% and 1.44%, respectively, the average outstanding balance was $278,617 and $285,924, respectively, and the interest expense incurred was $726 and $3,082, respectively. For the three and nine months ended September 30, 2008, the effective average interest rate was 3.30% and 3.77%, respectively, and the interest expense incurred was $2,612 and $8,877, respectively. Cash paid for interest expense during the nine months ended September 30, 2009 and 2008 was $3,210 and $9,068, respectively. The Company is also required to pay a commitment fee of 0.175% for any unused portion of the Class A-1A VFN Notes. There were no commitment fees incurred for the three and nine months ended September 30, 2009 and 2008 on these notes.

8.     FAIR VALUE OF FINANCIAL INSTRUMENTS

              Effective January 1, 2008, the company adopted ASC 825-10 (previously SFAS No. 159, the Fair Value Option for Financial Assets and Liabilities), which provides companies the option to report selected financial assets and liabilities at fair value. ASC 825-10 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the company's choice to use fair value on its earnings. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. The Company has not elected the ASC 25-10 option to report selected financial assets and liabilities at fair value. As a result, with the exception of the line items entitled "other assets" and "debt," which are reported at cost, all assets and liabilities approximate fair value on the balance sheet. The carrying value of the line items entitled "interest receivable," "receivable for open trades," "payable for open trades," "accounts payable and accrued expenses," "management and incentive fees payable" and "interest and facility fees payable" approximate fair value due to their short maturity.

              Effective January 1, 2008, the Company adopted ASC 820-10 (previously SFAS No. 157, Fair Value Measurements), which expands the application of fair value accounting. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosure of fair value measurements. ASC 820-10 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. ASC 820-10 requires the Company to assume that the portfolio investment is sold in a principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820-10, the Company has considered its principal market as the market in which the Company exits its portfolio investments with the greatest volume and level of activity. ASC 820-10 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below:

F-112


              In addition to using the above inputs in investment valuations, we continue to employ the valuation policy approved by our board of directors that is consistent with ASC 820-10 (see Note 2). Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value. Our valuation policy considers the fact that because there is not a readily available market value for most of the investments in our portfolio, the fair value of the investments must typically be determined using unobservable inputs.

              Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which we have recorded it.

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

              The following table presents fair value measurements of cash and cash equivalents and investments as of September 30, 2009:

 
   
  Fair Value Measurements Using  
 
  Total   Level 1   Level 2   Level 3  

Cash and cash equivalents

  $ 61,469   $ 61,469   $   $  

Investments

  $ 1,967,724   $   $ 27,904   $ 1,939,820  

              The following tables present changes in investments that use Level 3 inputs for the three and nine months ended September 30, 2009:

 
  Three months ended
September 30, 2009
 

Balance as of June 30, 2009

  $ 1,936,436  

Net realized and unrealized gains (losses)

    28,501  

Net purchases, sales or redemptions

    (25,117 )

Net transfers in and/or out of Level 3

     
       

Balance as of September 30, 2009

  $ 1,939,820  

 

 
  Nine months ended
September 30, 2009
 

Balance as of December 31, 2008

  $ 1,862,462  

Net realized and unrealized gains (losses)

    9,070  

Net purchases, sales or redemptions

    (17,212 )

Net transfers in and/or out of Level 3

    85,500  
       

Balance as of September 30, 2009

  $ 1,939,820  

              As of September 30, 2009, the net unrealized loss on the investments that use Level 3 inputs was $270,141.

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              Following are the carrying and fair values of our debt instruments as of September 30, 2009 and December 31, 2008. Fair value is estimated by discounting remaining payment using applicable current market rates which take into account changes in the Company's marketplace credit ratings.

 
  September 30, 2009   December 31, 2008  
 
  Carrying Value   Fair Value   Carrying Value   Fair Value  

Revolving Credit Facility

  $ 271,091   $ 263,000   $ 480,486   $ 462,000  

CP Funding Facility

    223,027     223,027     114,300     113,000  

CP Funding II Facility

                 

Debt Securitization

    273,753     207,000     314,000     148,000  
                   

  $ 767,871   $ 693,027   $ 908,786   $ 723,000  
                   

9.     RELATED PARTY TRANSACTIONS

              In accordance with the investment advisory and management 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, 2009, the investment adviser incurred such expenses totaling $456 and $1,400, respectively. For the three and nine months ended September 30, 2008, the investment adviser incurred such expenses totaling $442 and $1,448, respectively. As of September 30, 2009, $168 was unpaid and included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.

              We rent office space directly from a third party pursuant to a lease that expires on February 27, 2011. In addition, we have entered into a sublease agreement with Ares Management whereby Ares Management subleases approximately 25% of certain office space for a fixed rent equal to 25% of the basic annual rent payable by us under this lease, plus certain additional costs and expenses. For the three and nine months ended September 30, 2009, such amounts payable to the Company totaled $67 and $201, respectively. For the three and nine months ended September 30, 2008, such amounts payable to the Company totaled $51 and $171, respectively. As of September 30, 2009, there were no unpaid amounts.

              As of September 30, 2009, Ares Investments, an affiliate of Ares Management (the sole member of our investment adviser) owned 2,859,882 shares of the Company's common stock representing approximately 2.6% of the total shares outstanding as of September 30, 2009.

              See Notes 3 and 10 for descriptions of other related party transactions.

10.   IVY HILL FUNDS

              On November 19, 2007, we established a middle market credit fund, Ivy Hill Middle Market Credit Fund, Ltd. ("Ivy Hill I"), which is managed by our affiliate, Ivy Hill Asset Management, L.P. ("IHAM"). IHAM receives a 0.50% management fee on the average total assets of Ivy Hill I as compensation for managing this fund. As of September 30, 2009, the total assets of Ivy Hill I were approximately $372,000. For the three and nine months ended September 30, 2009, the Company earned $17 and $900, respectively, in management fees. For the three and nine months ended September 30, 2008, the Company earned $412 and $992, respectively, in management fees. Ivy Hill I primarily invests in first and second lien bank debt of middle market companies. Ivy Hill I was initially funded with $404,000 of capital, including a $56,000 investment by the Company consisting of $40,000 of Class B notes and $16,000 of subordinated notes. For the three and nine months ended September 30, 2009, the Company earned $1,402 and $4,424, respectively, from its investments in Ivy Hill I. For the three and nine months ended September 30, 2008, the Company earned $1,652 and $4,043, respectively, from its investments in Ivy Hill I.

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              Ivy Hill I purchased investments from the Company of $5,000 and $17,980 during the three and nine months ended September 30, 2009, respectively, and may from time to time buy additional investments from the Company. There was a loss of $20 recognized by the Company on these transactions.

              On November 5, 2008, the Company established a second middle market credit fund, Ivy Hill Middle Market Credit Fund II, Ltd. ("Ivy Hill II" and, together with Ivy Hill I, the "Ivy Hill Funds"), which is also managed by IHAM. IHAM receives a 0.50% management fee on the average total assets of Ivy Hill II as compensation for managing this fund. Ivy Hill II primarily invests in second lien and subordinated bank debt of middle market companies. Ivy Hill II was established with an initial commitment of $250,000 of subordinated notes, of which $125,000 has been funded, and may grow over time with leverage. Ivy Hill II purchased $27,500 of investments from the Company during the nine months ended September 30, 2009. The Company recorded a loss of $1,388 on these transactions. As of September 30, 2009, the total assets of Ivy Hill II were approximately $144,000. For the three and nine months ended September 30, 2009, the Company earned $12 and $365, respectively, in management fees.

              Our affiliate, IHAM, is party to a separate services agreement, referred to herein as the "services agreement," with Ares Capital Management. Pursuant to the services agreement, Ares Capital Management provides IHAM with office facilities, equipment, clerical, bookkeeping and record keeping services, services of investment professionals and others to perform investment advisory, research and related services, services of, and oversight of, custodians, depositories, accountants, attorneys, underwriters and such other persons in any other capacity deemed to be necessary. Under the services agreement, IHAM will reimburse Ares Capital Management for all of the costs associated with such services, including Ares Capital Management's allocable portion of overhead and the cost of its officers and respective staff in performing its obligations under the services agreement. The services agreement may be terminated by either party without penalty upon 60-days' written notice to the other party. For the three and nine months ended September 30, 2009, IHAM incurred such expenses payable to the investment adviser of $0 and $538, respectively. No such expenses were payable for the three and nine months ended September 30, 2008.

              In June 2009, because of a shift in activity from being primarily a manager with no dedicated employees and of funds in which the Company has invested debt and equity, to a manager with individuals dedicated to managing an increasing number of third party funds for which the Company has limited or no investment, we concluded that GAAP requires the financial results of IHAM to be reported as a portfolio company in our schedule of investments rather than as a consolidated subsidiary in the Company's financial results. The Company made an initial equity investment of $3,816 into IHAM in June 2009.

              For the three months ended September 30, 2009, the Company received a $2,240 distribution from IHAM consisting of $1,510 of dividend income and a $730 return of the Company's investment which resulted in a $494 realized gain. As of September 30, 2009, the Company had an unrealized gain of $7,501 on its investment in IHAM.

11.   DERIVATIVE INSTRUMENTS

              In October 2008, we entered into a two-year interest rate swap agreement to mitigate our exposure to adverse fluctuations in interest rates for a total notional amount of $75 million. Under the interest rate swap agreement, we will pay a fixed interest rate of 2.985% and receive a floating rate based on the prevailing three-month LIBOR. As of September 30, 2009 and December 31, 2008, the 3-month LIBOR was 0.29% and 1.43%, respectively. For the three and nine months ended September 30, 2009, we recognized $20 in unrealized depreciation and $101 in unrealized appreciation related to this swap agreement. As of September 30, 2009 and December 31, 2008, this swap agreement

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had a fair value of $(2,063) and $(2,164), respectively, which is included in the "accounts payable and other liabilities" in the accompanying consolidated balance sheet.

12.   STOCKHOLDERS' EQUITY

              On August 19, 2009, we completed a public add-on equity offering (the "August Add-on Offering") of 12,439,908 shares of common stock (including 1,439,908 shares purchased pursuant to the underwriters' over-allotment option) at a price of $9.25 per share, less an underwriting discount totaling approximately $0.42 per share. The shares were offered at a discount from the then most recently determined net asset value per share of $11.21 pursuant to authority granted by our common stockholders at the annual meeting of stockholders held on May 4, 2009. Total proceeds received from the August Add-on Offering, net of underwriters' discount and offering costs, were approximately $109.1 million.

              The following table summarizes the total shares issued and proceeds we received net of underwriter, dealer manager and offering costs for the nine months ended September 30, 2009 and 2008 (in millions, except per share data):

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

August 2009 public offering

    12.4   $ 9.25   $ 109.1  
                 
 

Total for the nine months ended September 30, 2009

    12.4         $ 109.1  

April 2008 public offering

   
24.2
 
$

11.00
 
$

259.8
 
                 
 

Total for the nine months ended September 30, 2008

    24.2         $ 259.8  

13.   DIVIDENDS

              The following table summarizes our dividends declared during the nine months ended September 30, 2009 and 2008 (in millions, except per share data):

Date Declared
  Record Date   Payment Date   Amount
Per Share
  Total
Amount
 

August 6, 2009

  September 15, 2009   September 30, 2009   $ 0.35   $ 38.4  

May 7, 2009

  June 15, 2009   June 30, 2009   $ 0.35   $ 34.1  

March 2, 2009

  March 16, 2009   March 31, 2009   $ 0.42   $ 40.8  
                   
 

Total declared for the nine months ended September 30, 2009

          $ 1.12   $ 113.3  

August 7, 2008

 
September 15, 2008
 
September 30, 2008
 
$

0.42
 
$

40.8
 

May 8, 2008

  June 16, 2008   June 30, 2008   $ 0.42   $ 40.8  

February 28, 2008

  March 17, 2008   March 31, 2008   $ 0.42   $ 30.5  
                   
 

Total declared for the nine months ended September 30, 2008

          $ 1.26   $ 112.1  

              During the nine months ended September 30, 2009, as part of the Company's dividend reinvestment plan for our common stockholders, we purchased 1,500,841 shares of our common stock at an average price of $6.86 in the open market in order to satisfy part of the reinvestment portion of our dividends.

F-116


14.   FINANCIAL HIGHLIGHTS

              The following is a schedule of financial highlights for the nine months ended September 30, 2009 and 2008:

 
  For the nine months ended  
Per Share Data:
  September 30, 2009   September 30, 2008  

Net asset value, beginning of period(1)

  $ 11.27   $ 15.47  

Issuance of common stock

    (0.28 )   (1.19 )

Effect of antidilution

    (0.04 )   0.14  

Net investment income for period(2)

    0.96     1.09  

Net realized and unrealized gains for period(2)

    0.38     (1.42 )
           
 

Net increase (decrease) in stockholders' equity

    1.34     (0.33 )

Distributions from net investment income

    (1.00 )   (1.24 )

Distributions from net realized capital gains on securities

    (0.13 )   (0.02 )
           
 

Total distributions to stockholders

    (1.13 )   (1.26 )
           

Net asset value at end of period(1)

  $ 11.16   $ 12.83  
           

Per share market value at end of period

  $ 11.02   $ 10.43  

Total return based on market value(3)

    91.94 %   (20.10 )%

Total return based on net asset value(4)

    12.02 %   (2.25 )%

Shares outstanding at end of period

    109,592,728     97,152,820  

Ratio/Supplemental Data:

             

Net assets at end of period

  $ 1,222,591   $ 1,246,182  

Ratio of operating expenses to average net assets(5)(6)

    9.72 %   8.80 %

Ratio of net investment income to average net assets(5)(7)

    11.49 %   10.00 %

Portfolio turnover rate(5)

    15 %   26 %

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

(2)
Weighted average basic per share data.

(3)
For the nine months ended September 30, 2009, the total return based on market value equals the decrease of the ending market value at September 30, 2009 of $11.02 per share over the ending market value at December 31, 2008 of $6.33 per share, plus the declared dividends of $1.12 per share for the nine months ended September 30, 2009, divided by the market value at December 31, 2008. For the nine months ended September 30, 2008, the total return based on market value equals the decrease of the ending market value at September 30, 2008 of $10.43 per share over the ending market value at December 31, 2007 of $14.63 per share, plus the declared dividends of $1.26 per share for the nine months ended September 30, 2008, divided by the market value at December 31, 2007. Total return based on market value is not annualized. 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.

(4)
For the nine months ended September 30, 2009, the total return based on net asset value equals the change in net asset value during the period plus the declared dividends of $1.12 per share for the nine months ended September 30, 2009, divided by the beginning net asset value during the period. For the nine months ended September 30, 2008, the total return based on net asset value equals the change in net asset value during the period plus the declared dividends of $1.26 per share for the nine months ended September 30, 2008, divided by the beginning net asset value during the period. These calculations are adjusted for shares issued in connection with the dividend reinvestment plan and the issuance of common stock in connection with any equity offerings. Total

F-117


(5)
The ratios reflect an annualized amount.

(6)
For the nine months ended September 30, 2009, the ratio of operating expenses to average net assets consisted of 2.72% of base management fees, 2.87% of incentive management fees, 2.25% of the cost of borrowing and other operating expenses of 1.88%. For the nine months ended September 30, 2008, the ratio of operating expenses to average net assets consisted of 2.40% of base management fees, 2.51% of incentive management fees, 2.81% of the cost of borrowing and other operating expenses of 1.08%. These ratios reflect annualized amounts.

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

15.   SUBSEQUENT EVENTS

              On October 26, 2009, we entered into a definitive agreement to acquire Allied Capital Corporation ("Allied Capital") in an all stock transaction (the "Allied Acquisition") valued at $648 million, or approximately $3.47 per Allied Capital share as of October 23, 2009. The boards of directors of both companies have each unanimously approved the Allied Acquisition.

              Under the terms of the transaction, each Allied Capital stockholder will be entitled to receive 0.325 shares of our common stock for each share of Allied Capital common stock then owned by such stockholder. In connection with the Allied Acquisition, approximately 58.3 million shares of Ares Capital common stock (not including the effect of outstanding in-the money options) will be issued to Allied Capital's existing stockholders, thereby resulting in existing Ares Capital stockholders owning approximately 65% of the combined company and existing Allied Capital stockholders owning approximately 35% of the combined company. Consummation of the Allied Acquisition is subject to Allied Capital stockholder approval, Ares Capital stockholder approval, customary regulatory approvals, certain Ares Capital and Allied Capital lender consents and other closing conditions. The transaction is expected to close by the end of the first quarter of 2010. However, there can be no assurance that the Allied Acquisition will be consummated within this time frame, or at all.

              In a separate transaction, on October 30, 2009, we completed our acquisition of Allied Capital's interests in the Senior Secured Loan Fund LLC (the "SL Fund," formerly known as the Unitranche Fund) for $165 million in cash. The SL Fund was formed in December 2007 to invest in "unitranche" loans of middle-market companies and has approximately $3.6 billion of committed capital (approximately $350 million of which would be funded by us), approximately $900 million in aggregate principal amount of which is currently funded.

F-118



Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Allied Capital Corporation:

              We have audited the accompanying consolidated balance sheet of Allied Capital Corporation and subsidiaries (the Company) as of December 31, 2008 and 2007, including the consolidated statements of investments as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in net assets and cash flows, and the financial highlights (included in Note 13), for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial highlights based on our audits.

              We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included physical inspection or confirmation of securities owned as of December 31, 2008 and 2007. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

              In our opinion, the consolidated financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Allied Capital Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations, their cash flows, changes in their net assets, and financial highlights for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

              The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company is in default on provisions of certain credit agreements. The credit agreement defaults provide the respective lenders the right to declare immediately due and payable unpaid amounts approximating $1.1 billion at December 31, 2008. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

              As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for share based payments in 2006 due to the adoption of Financial Accounting Standards Board Interpretation No. 123 (Revised 2004), Share Based Payment. Also, as discussed in Note 2 to the consolidated financial statements, the Company modified its method of determining the fair value of portfolio investments in 2008 due to the adoption of Statement of Financial Accounting Standards No. 157, Fair Value Measurements.

SIGNATURE

Washington, D.C.
March 2, 2009

F-119



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in thousands, except per share amounts)

 
  December 31,  
 
  2008   2007  

ASSETS

             

Portfolio at value:

             

Private finance

             

Companies more than 25% owned (cost: 2008-$2,167,020; 2007-$1,622,094)

  $ 1,187,722   $ 1,279,080  

Companies 5% to 25% owned (cost: 2008-$392,516; 2007-$426,908)

    352,760     389,509  

Companies less than 5% owned (cost: 2008-$2,317,856; 2007-$2,994,880)

    1,858,581     2,990,732  
           

Total private finance (cost: 2008-$4,877,392; 2007-$5,043,882)

    3,399,063     4,659,321  

Commercial real estate finance (cost: 2008-$85,503; 2007-$96,942)

    93,887     121,200  
           

Total portfolio at value (cost: 2008-$4,962,895; 2007-$5,140,824)

    3,492,950     4,780,521  

Accrued interest and dividends receivable

    55,638     71,429  

Other assets

    122,909     157,864  

Investments in money market and other securities

    287     201,222  

Cash

    50,402     3,540  
           

Total assets

  $ 3,722,186   $ 5,214,576  
           

LIABILITIES AND SHAREHOLDERS' EQUITY

             

Liabilities:

             

Notes payable (maturing or subject to acceleration within one year: 2008-$1,015,000; 2007-$153,000)

  $ 1,895,000   $ 1,922,220  

Revolving line of credit

    50,000     367,250  

Accounts payable and other liabilities

    58,786     153,259  
           

Total liabilities

    2,003,786     2,442,729  
           

Commitments and contingencies

             

Shareholders' equity:

             

Common stock, $0.0001 par value, 400,000 shares authorized; 178,692 and 158,002 shares issued and outstanding at December 31, 2008 and 2007, respectively

    18     16  

Additional paid-in capital

    3,037,845     2,657,939  

Common stock held in deferred compensation trust

        (39,942 )

Notes receivable from sale of common stock

    (1,089 )   (2,692 )

Net unrealized appreciation (depreciation)

    (1,503,089 )   (379,327 )

Undistributed earnings

    184,715     535,853  
           

Total shareholders' equity

    1,718,400     2,771,847  
           

Total liabilities and shareholders' equity

  $ 3,722,186   $ 5,214,576  
           

Net asset value per common share

  $ 9.62   $ 17.54  
           

The accompanying notes are an integral part of these consolidated financial statements.

F-120



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share amounts)

 
  For the Years Ended December 31,  
 
  2008   2007   2006  

Interest and Related Portfolio Income:

                   

Interest and dividends

                   

Companies more than 25% owned

  $ 111,188   $ 105,634   $ 102,636  

Companies 5% to 25% owned

    42,376     41,577     39,754  

Companies less than 5% owned

    303,854     270,365     244,037  
               

Total interest and dividends

   
457,418
   
417,576
   
386,427
 
               

Fees and other income

                   

Companies more than 25% owned

    28,278     18,505     29,606  

Companies 5% to 25% owned

    2,619     810     4,447  

Companies less than 5% owned

    13,929     24,814     32,078  
               

Total fees and other income

   
44,826
   
44,129
   
66,131
 
               

Total interest and related portfolio income

   
502,244
   
461,705
   
452,558
 
               

Expenses:

                   

Interest

    148,930     132,080     100,600  

Employee

    76,429     89,155     92,902  

Employee stock options

    11,781     35,233     15,599  

Administrative

    49,424     50,580     39,005  
               

Total operating expenses

   
286,564
   
307,048
   
248,106
 
               

Net investment income before income taxes

   
215,680
   
154,657
   
204,452
 

Income tax expense, including excise tax

    2,506     13,624     15,221  
               

Net investment income

   
213,174
   
141,033
   
189,231
 
               

Net Realized and Unrealized Gains (Losses):

                   

Net realized gains (losses)

                   

Companies more than 25% owned

    (131,440 )   226,437     513,314  

Companies 5% to 25% owned

    (14,120 )   (10,046 )   4,467  

Companies less than 5% owned

    16,142     52,122     15,520  
               

Total net realized gains (losses)

   
(129,418

)
 
268,513
   
533,301
 

Net change in unrealized appreciation or depreciation

    (1,123,762 )   (256,243 )   (477,409 )
               

Total net gains (losses)

   
(1,253,180

)
 
12,270
   
55,892
 
               

Net increase (decrease) in net assets resulting from operations

 
$

(1,040,006

)

$

153,303
 
$

245,123
 
               

Basic earnings (loss) per common share

 
$

(6.01

)

$

1.00
 
$

1.72
 
               

Diluted earnings (loss) per common share

 
$

(6.01

)

$

0.99
 
$

1.68
 
               

Weighted average common shares outstanding—basic

   
172,996
   
152,876
   
142,405
 
               

Weighted average common shares outstanding—diluted

   
172,996
   
154,687
   
145,599
 
               

The accompanying notes are an integral part of these consolidated financial statements.

F-121



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(in thousands, except per share amounts)

 
  For the Years Ended December 31,  
 
  2008   2007   2006  

Operations:

                   

Net investment income

  $ 213,174   $ 141,033   $ 189,231  

Net realized gains (losses)

    (129,418 )   268,513     533,301  

Net change in unrealized appreciation or depreciation

    (1,123,762 )   (256,243 )   (477,409 )
               

Net increase (decrease) in net assets resulting from operations

   
(1,040,006

)
 
153,303
   
245,123
 
               

Shareholder distributions:

                   

Common stock dividends

    (456,531 )   (407,317 )   (354,892 )

Preferred stock dividends

    (10 )   (10 )   (10 )
               

Net decrease in net assets resulting from shareholder distributions

   
(456,541

)
 
(407,327

)
 
(354,902

)
               

Capital share transactions:

                   

Sale of common stock

    402,478     171,282     295,769  

Issuance of common stock in lieu of cash distributions

    3,751     17,095     14,996  

Issuance of common stock upon the exercise of stock options

        14,251     11,734  

Cash portion of option cancellation payment

        (52,833 )    

Stock option expense

    11,906     35,810     15,835  

Net decrease in notes receivable from sale of common stock

    1,603     158     1,018  

Purchase of common stock held in deferred compensation trust

    (943 )   (12,444 )   (9,855 )

Distribution of common stock held in deferred compensation trust

    27,335     837     980  

Other

    (3,030 )   10,471      
               

Net increase in net assets resulting from capital share transactions

   
443,100
   
184,627
   
330,477
 
               

Total net increase (decrease) in net assets

   
(1,053,447

)
 
(69,397

)
 
220,698
 

Net assets at beginning of year

    2,771,847     2,841,244     2,620,546  
               

Net assets at end of year

 
$

1,718,400
 
$

2,771,847
 
$

2,841,244
 
               

Net asset value per common share

 
$

9.62
 
$

17.54
 
$

19.12
 
               

Common shares outstanding at end of year

   
178,692
   
158,002
   
148,575
 
               

The accompanying notes are an integral part of these consolidated financial statements.

F-122



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

 
  For the Years Ended December 31,  
 
  2008   2007   2006  

Cash flows from operating activities:

                   

Net increase (decrease) in net assets resulting from operations

  $ (1,040,006 ) $ 153,303   $ 245,123  

Adjustments:

                   

Portfolio investments

    (1,070,092 )   (1,845,973 )   (2,257,828 )

Principal collections related to investment repayments or sales

    1,037,348     1,211,550     1,055,347  

Payment-in-kind interest and dividends, net of cash collections

    (53,364 )   (11,997 )   (4,138 )

Change in accrued interest and dividends

    14,860     (11,916 )   (4,021 )

Net collection (amortization) of discounts and fees

    (13,083 )   (4,101 )   1,713  

Net redemption of U.S. Treasury bills, money market and other securities

    200,935     988     19,757  

Stock option expense

    11,906     35,810     15,835  

Changes in other assets and liabilities

    (41,481 )   (12,466 )   36,418  

Depreciation and amortization

    913     2,064     1,800  

Realized gains from the receipt of notes and other consideration from sale of investments, net of collections

    4,574     (17,706 )   (209,049 )

Realized losses

    279,886     131,997     24,169  

Net change in unrealized (appreciation) or depreciation

    1,123,762     256,243     477,409  
               

Net cash provided by (used in) operating activities

   
456,158
   
(112,204

)
 
(597,465

)
               

Cash flows from financing activities:

                   

Sale of common stock

    402,478     171,282     295,769  

Sale of common stock upon the exercise of stock options

        14,251     11,734  

Collections of notes receivable from sale of common stock

    1,603     158     1,018  

Borrowings under notes payable

    193,000     230,000     700,000  

Repayments on notes payable and debentures

    (218,212 )       (203,500 )

Net borrowings under (repayments on) revolving line of credit

    (317,250 )   159,500     116,000  

Cash portion of option cancellation payment

        (52,833 )    

Purchase of common stock held in deferred compensation trust

    (943 )   (12,444 )   (9,855 )

Payment of deferred financing costs and other financing activities

    (17,182 )   1,798     (6,795 )

Common stock dividends and distributions paid

    (452,780 )   (397,645 )   (336,572 )

Preferred stock dividends paid

    (10 )   (10 )   (10 )
               

Net cash provided by (used in) financing activities

   
(409,296

)
 
114,057
   
567,789
 
               

Net increase (decrease) in cash

   
46,862
   
1,853
   
(29,676

)

Cash at beginning of year

    3,540     1,687     31,363  
               

Cash at end of year

 
$

50,402
 
$

3,540
 
$

1,687
 
               

The accompanying notes are an integral part of these consolidated financial statements.

F-123



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS

December 31, 2008

(in thousands, except number of shares)

Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Companies More Than 25% Owned

                       

AGILE Fund I, LLC(5)

 

Equity Interests

       
$

694
 
$

497
 
 

(Private Equity Fund)

                       
                     

  Total Investment           694     497  
                     

AllBridge Financial, LLC

  Equity Interests           33,294     10,960  
 

(Asset Management)

                       
                     

  Total Investment           33,294     10,960  
                     

  Standby Letter of Credit ($15,000)                    

Allied Capital Senior Debt Fund, L.P.(5)

 

Equity Interests (See Note 3)

         
31,800
   
31,800
 
 

(Private Debt Fund)

                       
                     

  Total Investment           31,800     31,800  
                     

Avborne, Inc.(7)

  Preferred Stock (12,500 shares)               942  
 

(Business Services)

  Common Stock (27,500 shares)                
                     

  Total Investment               942  
                     

Avborne Heavy Maintenance, Inc.(7)

  Common Stock (2,750 shares)                
 

(Business Services)

                       
                     

  Total Investment                
                     

Aviation Properties Corporation

  Common Stock (100 shares)           93      
 

(Business Services)

                       
                     

  Total Investment           93      
                     

  Standby Letters of Credit ($1,000)                    

Border Foods, Inc. 

 

Senior Loan (12.6%, Due 12/09–3/12)

 
$

33,027
   
26,860
   
33,027
 
 

(Consumer Products)

  Preferred Stock (100,000 shares)           12,721     11,851  

  Common Stock (260,467 shares)           3,847      
                     

  Total Investment           43,428     44,878  
                     

Calder Capital Partners, LLC(5)

  Senior Loan (10.5%, Due 5/09)(6)     4,496     4,496     953  
 

(Asset Management)

  Equity Interests           2,453      
                     

  Total Investment           6,949     953  
                     

Callidus Capital Corporation

  Subordinated Debt                    
 

(Asset Management)

  (18.0%, Due 8/13–2/14)     16,068     16,068     16,068  
 

  Common Stock (100 shares)               34,377  
                     

  Total Investment           16,068     50,445  
                     

  Guaranty ($6,447)                    

Ciena Capital LLC

 

Senior Loan (5.5%, Due 3/09)(6)

   
319,031
   
319,031
   
104,883
 
 

(Financial Services)

  Class B Equity Interests           119,436      

  Class C Equity Interests           109,301      
                     

  Total Investment           547,768     104,883  
                     

F-124


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

  Guaranty ($5,000—See Note 3)                    

  Standby Letters of Credit ($102,600—See Note 3)                    

CitiPostal Inc. 

 

Senior Loan (4.0%, Due 12/13)

 
$

692
 
$

681
 
$

681
 
 

(Business Services)

  Unitranche Debt (12.0%, Due 12/13)     51,758     51,548     51,548  

  Subordinated Debt (16.0%, Due 12/15)     9,114     9,114     9,114  

  Common Stock (37,024 shares)           12,726     8,616  
                     

  Total Investment           74,069     69,959  
                     

Coverall North America, Inc. 

  Unitranche Debt (12.0%, Due 7/11)     32,035     31,948     31,948  
 

(Business Services)

  Subordinated Debt (15.0%, Due 7/11)     5,563     5,549     5,549  

  Common Stock (763,333 shares)           14,361     17,968  
                     

  Total Investment           51,858     55,465  
                     

CR Holding, Inc. 

  Subordinated Debt (16.6%,                    
 

(Consumer Products)

  Due 2/13)(6)     39,307     39,193     17,360  

  Common Stock (32,090,696 shares)           28,744      
                     

  Total Investment           67,937     17,360  
                     

Crescent Equity Corp.(8)

  Senior Loan (10.0%, Due 1/09)     433     433     433  
 

(Business Services)

  Subordinated Debt (11.0%, Due 9/11–6/17)     22,312     22,247     14,283  

  Subordinated Debt (11.0%, Due 1/12–9/12)(6)     10,097     10,072     4,331  

  Common Stock (174 shares)           81,255     4,580  
                     

  Total Investment           114,007     23,627  
                     

  Guaranty ($900)                    

  Standby Letters of Credit ($200)                    

Direct Capital Corporation

 

Subordinated Debt (16.0%,

                   
 

(Financial Services)

  Due 3/13)(6)     55,671     55,496     13,530  
 

  Common Stock (2,317,020 shares)           25,732      
                     

  Total Investment           81,228     13,530  
                     

Financial Pacific Company

  Subordinated Debt (17.4%,                    
 

(Financial Services)

  Due 2/12–8/12)     68,967     68,840     62,189  
 

  Preferred Stock (9,458 shares)           8,865      

  Common Stock (12,711 shares)           12,783      
                     

  Total Investment           90,488     62,189  
                     

ForeSite Towers, LLC

  Equity Interest               889  
 

(Tower Leasing)

                       
                     

  Total Investment               889  
                     

Global Communications, LLC

  Senior Loan (10.0%, Due 9/02)(6)     1,335     1,335     1,335  
 

(Business Services)

                       
                     

  Total Investment           1,335     1,335  
                     

Hot Light Brands, Inc. 

  Senior Loan (9.0%, Due 2/11)(6)     30,522     30,522     13,678  
 

(Retail)

  Common Stock (93,500 shares)           5,151      
                     

  Total Investment           35,673     13,678  
                     

F-125


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

  Standby Letter of Credit ($105)                    

Hot Stuff Foods, LLC

  Senior Loan (4.0%, Due 2/11–2/12)   $ 53,597   $ 53,456   $ 42,378  
 

(Consumer Products)

  Subordinated Debt                    

  (12.4%, Due 8/12–2/13)(6)     83,692     83,387      

  Common Stock (1,147,453 shares)           56,187      
                     

  Total Investment           193,030     42,378  
                     

Huddle House, Inc. 

  Subordinated Debt                    

(Retail)

  (15.0%, Due 12/12)     57,244     57,067     57,067  
 

  Common Stock (358,428 shares)           35,828     20,922  
                     

  Total Investment           92,895     77,989  
                     

IAT Equity, LLC and Affiliates
d/b/a Industrial Air Tool

  Subordinated Debt (9.0%, Due 6/14)     6,000     6,000     6,000  
 

(Industrial Products)

  Equity Interests           7,500     8,860  
                     

  Total Investment           13,500     14,860  
                     

Impact Innovations Group, LLC

  Equity Interests in Affiliate               321  
 

(Business Services)

                       
                     

  Total Investment               321  
                     

Insight Pharmaceuticals Corporation

  Subordinated Debt (15.0%, Due 9/12)     45,827     45,738     45,827  
 

(Consumer Products)

  Subordinated Debt (19.0%, Due 9/12)(6)     16,177     16,126     17,532  

  Preferred Stock (25,000 shares)           25,000     4,068  

  Common Stock (620,000 shares)           6,325      
                     

  Total Investment           93,189     67,427  
                     

Jakel, Inc. 

  Subordinated Debt (15.5%,     748     748     374  
 

(Industrial Products)

  Due 3/08)(6)                    
                     

  Total Investment           748     374  
                     

Knightsbridge CLO 2007-1 Ltd.(4)

  Class E Notes (13.8%, Due 1/22)     18,700     18,700     14,866  
 

(CLO)

  Income Notes (14.9%)(11)           40,914     35,214  
                     

  Total Investment           59,614     50,080  
                     

Knightsbridge CLO 2008-1 Ltd.(4)

  Class C Notes (9.3%, Due 6/18)     12,800     12,800     12,800  
 

(CLO)

  Class D Notes (10.3%, Due 6/18)     8,000     8,000     8,000  

  Class E Notes (6.8%, Due 6/18)     13,200     10,573     10,573  

  Income Notes (16.6%)(11)           21,315     21,315  
                     

  Total Investment           52,688     52,688  
                     

MHF Logistical Solutions, Inc. 

  Subordinated Debt (13.0%,                    
 

(Business Services)

  Due 6/12–6/13)(6)     49,841     49,633      

  Preferred Stock (10,000 shares)                

  Common Stock (20,934 shares)           20,942      
                     

  Total Investment           70,575      
                     

MVL Group, Inc. 

  Senior Loan (12.0%, Due 6/09–7/09)     30,674     30,663     30,663  
 

(Business Services)

  Subordinated Debt (14.5%, Due 6/09–7/09)     41,074     40,994     40,994  

  Subordinated Debt (3.0%, Due 6/09)(6)     144     139     86  

  Common Stock (560,716 shares)           555      
                     

  Total Investment           72,351     71,743  
                     

F-126


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Old Orchard Brands, LLC

  Subordinated Debt (18.0%, Due 7/14)   $ 18,951   $ 18,882   $ 18,882  
 

(Consumer Products)

  Equity Interests           16,857     27,763  
                     

  Total Investment           35,739     46,645  
                     

Penn Detroit Diesel Allison, LLC

  Subordinated Debt (15.5%, Due 8/13)     37,984     37,869     37,869  
 

(Business Services)

  Equity Interests           18,873     21,100  
                     

  Total Investment           56,742     58,969  
                     

Service Champ, Inc. 

  Subordinated Debt (15.5%, Due 4/12)     27,050     26,984     26,984  
 

(Business Services)

  Common Stock (55,112 shares)           11,785     21,156  
                     

  Total Investment           38,769     48,140  
                     

Stag-Parkway, Inc. 

  Unitranche Debt (14.0%, Due 7/12)     17,975     17,920     17,962  
 

(Business Services)

  Common Stock (25,000 shares)           32,686     6,968  
                     

  Total Investment           50,606     24,930  
                     

Startec Equity, LLC

  Equity Interests           211     332  
 

(Telecommunications)

                       
                     

  Total Investment           211     332  
                     

Unitranche Fund LLC

  Subordinated Certificates (12.0%)           125,423     125,423  
 

(Private Debt Fund)

  Equity Interests           1     1  
                     

  Total Investment           125,424     125,424  
                     

Worldwide Express Operations, LLC

  Subordinated Debt (14.0%,     2,865     2,722     2,032  
 

(Business Services)

  Due 2/14)(6)                    

  Equity Interests           11,384      

  Warrants           144      
                     

  Total Investment           14,250     2,032  
                     
 

Total companies more than 25% owned

            $ 2,167,020   $ 1,187,722  
                     

Companies 5% to 25% Owned

                       

10th Street, LLC

 

Subordinated Debt (13.0%,

                   
 

(Business Services)

  Due 11/14)     21,439     21,329     21,439  

  Equity Interests           422     975  

  Option           25     25  
                     

  Total Investment           21,776     22,439  
                     

Advantage Sales & Marketing, Inc. 

  Subordinated Debt (12.0%, Due 3/14)     158,617     158,132     135,000  
 

(Business Services)

  Equity Interests               5,000  
                     

  Total Investment           158,132     140,000  
                     

Air Medical Group Holdings LLC

  Senior Loan (3.3%, Due 3/11)     3,360     3,326     3,139  
 

(Healthcare Services)

  Equity Interests           2,993     10,800  
                     

  Total Investment           6,319     13,939  
                     

Alpine ESP Holdings, Inc. 

  Preferred Stock (701 shares)           701      
 

(Business Services)

  Common Stock (11,657 shares)           13      
                     

  Total Investment           714      
                     

Amerex Group, LLC

  Subordinated Debt (12.3%, Due 1/13)     8,789     8,784     8,784  
 

(Consumer Products)

  Equity Interests           3,508     9,932  
                     

  Total Investment           12,292     18,716  
                     

F-127


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

BB&T Capital Partners/Windsor

  Equity Interests         $ 11,789   $ 11,063  
 

Mezzanine Fund, LLC(5)

                       
 

(Private Equity Fund)

                       
                     

  Total Investment           11,789     11,063  
                     

Becker Underwood, Inc. 

  Subordinated Debt (14.5%, Due 8/12)   $ 25,503     25,450     25,502  
 

(Industrial Products)

  Common Stock (4,376 shares)           5,014     2,267  
                     

  Total Investment           30,464     27,769  
                     

Drew Foam Companies, Inc. 

  Preferred Stock (622,555 shares)           623     512  
 

(Business Services)

  Common Stock (6,286 shares)           6      
                     

  Total Investment           629     512  
                     

Driven Brands, Inc. 

  Subordinated Debt (16.5%, Due 7/15)     84,106     83,698     83,698  
 

(Consumer Services)

  Common Stock (3,772,098 shares)           9,516     4,855  
                     

  Total Investment           93,214     88,553  
                     

Hilden America, Inc. 

  Common Stock (19 shares)           454     76  
 

(Consumer Products)

                       
                     

  Total Investment           454     76  
                     

Lydall Transport, Ltd. 

  Equity Interests           432     345  
 

(Business Services)

                       
                     

  Total Investment           432     345  
                     

Multi-Ad Services, Inc. 

  Unitranche Debt (11.3%, Due 11/11)     3,018     2,995     2,941  
 

(Business Services)

  Equity Interests           1,737     1,782  
                     

  Total Investment           4,732     4,723  
                     

Progressive International

  Preferred Stock (500 shares)           500     1,125  
 

Corporation

  Common Stock (197 shares)           13     4,600  
 

(Consumer Products)

  Warrants                
                     

  Total Investment           513     5,725  
                     

Regency Healthcare Group, LLC

  Unitranche Debt (11.1%, Due 6/12)     10,901     10,855     10,825  
 

(Healthcare Services)

  Equity Interests           1,302     2,050  
                     

  Total Investment           12,157     12,875  
                     

SGT India Private Limited(4)

  Common Stock (150,596 shares)           4,137      
 

(Business Services)

                       
                     

  Total Investment           4,137      
                     

Soteria Imaging Services, LLC

  Subordinated Debt (11.3%,                    
 

(Healthcare Services)

  Due 11/10)     4,250     4,167     4,054  

  Equity Interests           1,881     1,971  
                     

  Total Investment           6,048     6,025  
                     

Triax Holdings, LLC

  Subordinated Debt (21.0%,                    
 

(Consumer Products)

  Due 2/12)(6)     10,625     10,587      

  Equity Interests           16,528      
                     

  Total Investment           27,115      
                     

Universal Environmental Services, LLC

  Equity Interests           1,599      
 

(Business Services)

                       
                     

  Total Investment           1,599      
                     

F-128


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  
 

Total companies 5% to 25% owned

            $ 392,516   $ 352,760  
                     

Companies Less Than 5% Owned

                       

3SI Security Systems, Inc. 

 

Subordinated Debt (14.6%, Due 8/13)

 
$

29,200
 
$

29,118
 
$

28,170
 
 

(Consumer Products)

                       
                     

  Total Investment           29,118     28,170  
                     

Abraxas Corporation

  Subordinated Debt (14.6%, Due 4/13)     36,822     36,662     36,170  
 

(Business Services)

                       
                     

  Total Investment           36,662     36,170  
                     

Augusta Sportswear Group, Inc. 

  Subordinated Debt (13.0%, Due 1/15)     53,000     52,825     52,406  
 

(Consumer Products)

  Common Stock (2,500 shares)           2,500     1,400  
                     

  Total Investment           55,325     53,806  
                     

Axium Healthcare Pharmacy, Inc. 

  Senior Loan (14.0%, Due 12/12)     3,750     3,724     3,654  
 

(Healthcare Services)

  Unitranche Debt (14.0%, Due 12/12)     8,500     8,471     7,908  

  Common Stock (22,860 shares)           2,286     100  
                     

  Total Investment           14,481     11,662  
                     

Baird Capital Partners IV Limited(5)

  Limited Partnership Interest           3,636     2,978  
 

(Private Equity Fund)

                       
                     

  Total Investment           3,636     2,978  
                     

BenefitMall Holdings Inc. 

  Subordinated Debt (18.0%, Due 6/14)     40,326     40,238     40,238  
 

(Business Services)

  Common Stock (39,274,290 shares)(12)           39,274     91,149  

  Warrants(12)                
                     

  Total Investment           79,512     131,387  
                     

Broadcast Electronics, Inc. 

  Senior Loan (8.8%, Due 11/11)(6)     4,912     4,884     773  
 

(Business Services)

  Preferred Stock (2,044 shares)                
                     

  Total Investment           4,884     773  
                     

Bushnell, Inc. 

  Subordinated Debt (8.0%, Due 2/14)     41,325     40,003     35,794  
 

(Consumer Products)

                       
                     

  Total Investment           40,003     35,794  
                     

Callidus Debt Partners

  Class C Notes (12.9%, Due 12/13)     18,800     18,907     10,116  
 

CDO Fund I, Ltd.(4)(10)

  Class D Notes (17.0%, Due 12/13)     9,400     9,454      
 

(CDO)

                       
                     

  Total Investment           28,361     10,116  
                     

Callidus Debt Partners

  Preferred Shares (23,600,000 shares)           20,138     5,402  
 

CLO Fund III, Ltd.(4)(10)

                       
 

(CLO)

                       
                     

  Total Investment           20,138     5,402  
                     

F-129


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Callidus Debt Partners

  Class D Notes (9.1%, Due 4/20)   $ 3,000   $ 2,045   $ 1,445  
 

CLO Fund IV, Ltd.(4)(10)

  Income Notes (13.2%)(11)           14,591     10,628  
 

(CLO)

                       
                     

  Total Investment           16,636     12,073  
                     

Callidus Debt Partners

  Income Notes (16.4%)(11)           13,388     10,331  
 

CLO Fund V, Ltd.(4)(10)

                       
 

(CLO)

                       
                     

  Total Investment           13,388     10,331  
                     

Callidus Debt Partners

  Class D Notes (9.8%, Due 10/21)     9,000     7,144     3,929  
 

CLO Fund VI, Ltd.(4)(10)

  Income Notes (17.8%)(11)           28,314     23,090  
 

(CLO)

                       
                     

  Total Investment           35,458     27,019  
                     

Callidus Debt Partners

  Income Notes (11.4%)(11)           24,026     15,361  
 

CLO Fund VII, Ltd.(4)(10)

                       
 

(CLO)

                       
                     

  Total Investment           24,026     15,361  
                     

Callidus MAPS CLO Fund I LLC(10)

  Class E Notes (7.0%, Due 12/17)     17,000     17,000     9,813  
 

(CLO)

  Income Notes (4.0%)(11)           45,053     27,678  
                     

  Total Investment           62,053     37,491  
                     

Callidus MAPS CLO Fund II, Ltd.(4)(10)

  Class D Notes (8.8%, Due 7/22)     7,700     3,555     2,948  
 

(CLO)

  Income Notes (13.3%)(11)           18,393     12,626  
                     

  Total Investment           21,948     15,574  
                     

Carlisle Wide Plank Floors, Inc. 

  Senior Loan (6.1%, Due 6/11)     1,000     998     953  
 

(Consumer Products)

  Unitranche Debt (14.5%, Due 6/11)     3,161     3,139     3,047  

  Preferred Stock (345,056 Shares)           345     82  
                     

  Total Investment           4,482     4,082  
                     

Catterton Partners VI, L.P.(5)

  Limited Partnership Interest           2,812     2,356  
 

(Private Equity Fund)

                       
                     

  Total Investment           2,812     2,356  
                     

Centre Capital Investors V, L.P.(5)

  Limited Partnership Interest           3,049     2,344  
 

(Private Equity Fund)

                       
                     

  Total Investment           3,049     2,344  
                     

CK Franchising, Inc. 

  Subordinated Debt (12.3%,                    
 

(Consumer Services)

  Due 7/12–7/17)     21,000     20,912     20,912  

  Preferred Stock (1,281,887 shares)           1,282     1,592  

  Common Stock (7,585,549 shares)           7,586     10,600  
                     

  Total Investment           29,780     33,104  
                     

Commercial Credit Group, Inc. 

  Subordinated Debt (15.0%, Due 6/15)     19,000     18,970     18,970  
 

(Financial Services)

  Preferred Stock (64,679 shares)           15,543     9,073  

  Warrants                
                     

  Total Investment           34,513     28,043  
                     

Community Education Centers, Inc. 

  Subordinated Debt (14.5%,                    
 

(Education Services)

  Due 11/13)     35,548     35,486     34,056  
                     

  Total Investment           35,486     34,056  
                     

F-130


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Component Hardware Group, Inc. 

  Subordinated Debt (13.5%, Due 1/13)   $ 18,710   $ 18,654   $ 18,261  
 

(Industrial Products)

                       
                     

  Total Investment           18,654     18,261  
                     

Cook Inlet Alternative Risk, LLC

  Unitranche Debt (10.8%, Due 4/13)     90,000     89,619     82,839  
 

(Business Services)

  Equity Interests           552      
                     

  Total Investment           90,171     82,839  
                     

Cortec Group Fund IV, L.P.(5)

  Limited Partnership Interest           4,647     3,445  
 

(Private Equity)

                       
                     

  Total Investment           4,647     3,445  
                     

Diversified Mercury Communications, LLC

  Senior Loan (4.5%, Due 3/13)     2,972     2,958     2,692  
 

(Business Services)

                       
                     

  Total Investment           2,958     2,692  
                     

Digital VideoStream, LLC

  Unitranche Debt (11.0%, Due 2/12)     14,097     14,032     14,003  
 

(Business Services)

  Convertible Subordinated Debt (10.0%, Due 2/16)     4,545     4,533     4,700  
                     

  Total Investment           18,565     18,703  
                     

DirectBuy Holdings, Inc. 

  Subordinated Debt (14.5%, Due 5/13)     75,909     75,609     71,703  
 

(Consumer Products)

  Equity Interests           8,000     3,200  
                     

  Total Investment           83,609     74,903  
                     

Distant Lands Trading Co. 

  Senior Loan (7.5%, Due 11/11)     4,825     4,800     4,501  
 

(Consumer Products)

  Unitranche Debt (12.3%, Due 11/11)     43,133     43,022     42,340  

  Common Stock (3,451 shares)           3,451     984  
                     

  Total Investment           51,273     47,825  
                     

Dryden XVIII Leveraged Loan 2007 Limited(4)

  Class B Notes (8.0%, Due 10/19)     9,000     7,728     4,535  
 

(CLO)

  Income Notes (16.0%)(11)           22,080     17,477  
                     

  Total Investment           29,808     22,012  
                     

Dynamic India Fund IV(4)(5)

  Equity Interests           9,350     8,966  
 

(Private Equity Fund)

                       
                     

  Total Investment           9,350     8,966  
                     

EarthColor, Inc. 

  Subordinated Debt (15.0%, Due 11/13)(6)     123,819     123,385     77,243  
 

(Business Services)

  Common Stock (63,438 shares)(12)           63,438      

  Warrants(12)                
                     

  Total Investment           186,823     77,243  
                     

eCentury Capital Partners, L.P.(5)

  Limited Partnership Interest           7,274     1,431  
 

(Private Equity Fund)

                       
                     

  Total Investment           7,274     1,431  
                     

eInstruction Corporation

  Subordinated Debt (12.6%, Due 7/14-1/15)     33,931     33,795     31,670  
 

(Education Services)

  Common Stock (2,406 shares)           2,500     1,700  
                     

  Total Investment           36,295     33,370  
                     

Farley's & Sathers Candy Company, Inc. 

  Subordinated Debt (10.1%, Due 3/11)     2,500     2,493     2,365  
 

(Consumer Products)

                       
                     

  Total Investment           2,493     2,365  
                     

F-131


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

FCP-BHI Holdings, LLC
d/b/a Bojangles'

  Subordinated Debt (12.0%, Due 9/13)   $ 27,284   $ 27,191   $ 25,640  
 

(Retail)

  Equity Interests           1,029     1,700  
                     

  Total Investment           28,220     27,340  
                     

Fidus Mezzanine Capital, L.P.(5)

  Limited Partnership Interest           9,597     6,754  
 

(Private Equity Fund)

                       
                     

  Total Investment           9,597     6,754  
                     

Freedom Financial Network, LLC

  Subordinated Debt (13.5%, Due 2/14)     13,000     12,945     12,811  
 

(Financial Services)

                       
                     

  Total Investment           12,945     12,811  
                     

Geotrace Technologies, Inc. 

  Warrants           2,027     3,000  
 

(Energy Services)

                       
                     

  Total Investment           2,027     3,000  
                     

Gilchrist & Soames, Inc. 

  Subordinated Debt (13.4%, Due 10/13)     25,800     25,660     24,692  
 

(Consumer Products)

                       
                     

  Total Investment           25,660     24,692  
                     

Havco Wood Products LLC

  Equity Interests           910     400  
 

(Industrial Products)

                       
                     

  Total Investment           910     400  
                     

Higginbotham Insurance Agency, Inc. 

  Subordinated Debt (13.7%, Due 8/13-8/14)     53,305     53,088     53,088  
 

(Business Services)

  Common Stock (23,695 shares)(12)           23,695     27,335  

  Warrant(12)                
                     

  Total Investment           76,783     80,423  
                     

The Hillman Companies, Inc.(3)

  Subordinated Debt (10.0%, Due 9/11)     44,580     44,491     44,345  
 

(Consumer Products)

                       
                     

  Total Investment           44,491     44,345  
                     

The Homax Group, Inc. 

  Senior Loan (7.2%, Due 10/12)     11,785     11,742     10,689  
 

(Consumer Products)

  Subordinated Debt (14.5%, Due 4/14)     14,000     13,371     12,859  

  Preferred Stock (76 shares)           76      

  Common Stock (24 shares)           5      

  Warrants           954      
                     

  Total Investment           26,148     23,548  
                     

Ideal Snacks Corporation

  Senior Loan (5.3%, Due 6/10)     1,496     1,496     1,438  
 

(Consumer Products)

                       
                     

  Total Investment           1,496     1,438  
                     

Kodiak Fund LP(5)

  Equity Interests           9,422     900  
 

(Private Equity Fund)

                       
                     

  Total Investment           9,422     900  
                     

Market Track Holdings, LLC

  Senior Loan (8.0%, Due 6/14)     2,500     2,450     2,352  
 

(Business Services)

  Subordinated Debt (15.9%, Due 6/14)     24,600     24,488     23,785  
                     

  Total Investment           26,938     26,137  
                     

NetShape Technologies, Inc. 

  Senior Loan (5.3%, Due 2/13)     382     382     346  
 

(Industrial Products)

                       
                     

  Total Investment           382     346  
                     

F-132


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Network Hardware Resale, Inc. 

  Unitranche Debt (12.5%, Due 12/11)   $ 18,734   $ 18,809   $ 18,703  
 

(Business Services)

  Convertible Subordinated Debt (9.8%, Due 12/15)     14,533     14,585     14,585  
                     

  Total Investment           33,394     33,288  
                     

Novak Biddle Venture Partners III, L.P.(5)

  Limited Partnership Interest           2,018     1,349  
 

(Private Equity Fund)

                       
                     

  Total Investment           2,018     1,349  
                     

Oahu Waste Services, Inc. 

  Stock Appreciation Rights           206     750  
 

(Business Services)

                       
                     

  Total Investment           206     750  
                     

Pangaea CLO 2007-1 Ltd.(4)

  Class D Notes (9.2%, Due 10/21)     15,000     11,761     7,114  
 

(CLO)

                       
                     

  Total Investment           11,761     7,114  
                     

PC Helps Support, LLC

  Senior Loan (4.8%, Due 12/13)     8,610     8,520     8,587  
 

(Business Services)

  Subordinated Debt (13.3%, Due 12/13)     28,136     28,009     28,974  
                     

  Total Investment           36,529     37,561  
                     

Performant Financial Corporation

  Common Stock (478,816 shares)           734     200  
 

(Business Services)

                       
                     

  Total Investment           734     200  
                     

Peter Brasseler Holdings, LLC

  Equity Interests           3,451     2,900  
 

(Business Services)

                       
                     

  Total Investment           3,451     2,900  
                     

PharMEDium Healthcare Corporation

  Senior Loan (4.3%, Due 10/13)     1,910     1,910     1,747  
 

(Healthcare Services)

                       
                     

  Total Investment           1,910     1,747  
                     

Postle Aluminum Company, LLC

  Unitranche Debt (13.0%, Due 10/12)(6)     58,953     58,744     9,978  
 

(Industrial Products)

  Equity Interests           2,174      
                     

  Total Investment           60,918     9,978  
                     

Pro Mach, Inc. 

  Subordinated Debt (12.5%, Due 6/12)     14,616     14,573     14,089  
 

(Industrial Products)

  Equity Interests           1,294     1,900  
                     

  Total Investment           15,867     15,989  
                     

Promo Works, LLC

  Unitranche Debt (12.3%, Due 12/11)     23,111     22,954     21,266  
 

(Business Services)

                       
                     

  Total Investment           22,954     21,266  
                     

Reed Group, Ltd. 

  Senior Loan (7.6%, Due 12/13)     12,893     12,758     11,502  
 

(Healthcare Services)

  Subordinated Debt (13.8%, Due 12/13)     18,543     18,469     16,683  

  Equity Interests           1,800     300  
                     

  Total Investment           33,027     28,485  
                     

S.B. Restaurant Company

  Unitranche Debt (9.8%, Due 4/11)     36,501     36,295     34,914  
 

(Retail)

  Preferred Stock (46,690 shares)           117     117  

  Warrants           534      
                     

  Total Investment           36,946     35,031  
                     

F-133


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

  Standby Letters of Credit ($2,465)                    

Snow Phipps Group, L.P.(5)

  Limited Partnership Interest         $ 4,785   $ 4,374  
 

(Private Equity Fund)

                       
                     

  Total Investment           4,785     4,374  
                     

SPP Mezzanine Funding II, L.P.(5)

  Limited Partnership Interest           9,362     9,269  
 

(Private Equity Fund)

                       
                     

  Total Investment           9,362     9,269  
                     

STS Operating, Inc. 

  Subordinated Debt (11.0%, Due 1/13)   $ 30,386     30,296     29,745  
 

(Industrial Products)

                       
                     

  Total Investment           30,296     29,745  
                     

Summit Energy Services, Inc. 

  Subordinated Debt (11.6%, Due 8/13)     35,730     35,547     32,113  
 

(Business Services)

  Common Stock (415,982 shares)           1,861     1,900  
                     

  Total Investment           37,408     34,013  
                     

Tank Intermediate Holding Corp. 

  Senior Loan (7.1%, Due 9/14)     30,514     29,539     25,937  
 

(Industrial Products)

                       
                     

  Total Investment           29,539     25,937  
                     

Tappan Wire & Cable Inc. 

  Unitranche Debt (15.0%, Due 8/14)     22,346     22,248     15,625  
 

(Business Services)

  Common Stock (12,940 shares)(12)           2,043      

  Warrant(12)                
                     

  Total Investment           24,291     15,625  
                     

The Step2 Company, LLC

  Unitranche Debt (11.0%, Due 4/12)     95,083     94,816     90,474  
 

(Consumer Products)

  Equity Interests           2,156     1,161  
                     

  Total Investment           96,972     91,635  
                     

Tradesmen International, Inc. 

  Subordinated Debt (12.0%, Due 12/12)     40,000     39,586     37,840  
 

(Business Services)

                       
                     

  Total Investment           39,586     37,840  
                     

TransAmerican Auto Parts, LLC

  Subordinated Debt (16.3%, Due 11/12)(6)     24,561     24,409      
 

(Consumer Products)

  Equity Interests           1,034      
                     

  Total Investment           25,443      
                     

Trover Solutions, Inc. 

  Subordinated Debt (12.0%, Due 11/12)     60,054     59,847     57,362  
 

(Business Services)

                       
                     

  Total Investment           59,847     57,362  
                     

United Road Towing, Inc. 

  Subordinated Debt (12.1%, Due 1/14)     20,000     19,915     20,000  
 

(Consumer Services)

                       
                     

  Total Investment           19,915     20,000  
                     

Venturehouse-Cibernet Investors, LLC

  Equity Interest                
 

(Business Services)

                       
                     

  Total Investment                
                     

VICORP Restaurants, Inc. 

  Warrants           33      
 

(Retail)

                       
                     

  Total Investment           33      
                     

F-134


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

WMA Equity Corporation and Affiliates

  Subordinated Debt (16.8%, Due 4/13-4/14)(6)   $ 139,455   $ 138,559   $ 63,823  

d/b/a Wear Me Apparel

  Common Stock (86 shares)           39,721      
 

(Consumer Products)

                       
                     

  Total Investment           178,280     63,823  
                     

Webster Capital II, L.P.(5)

  Limited Partnership Interest           1,702     1,481  
 

(Private Equity Fund)

                       
                     

  Total Investment           1,702     1,481  
                     

Woodstream Corporation

  Subordinated Debt (12.0%, Due 2/15)     90,000     89,633     83,258  
 

(Consumer Products)

  Common Stock (6,960 shares)           6,961     2,500  
                     

  Total Investment           96,594     85,758  
                     

York Insurance Services Group, Inc. 

  Common Stock (12,939 shares)           1,294     1,700  
 

(Business Services)

                       
                     

  Total Investment           1,294     1,700  
                     

Other companies

  Other debt investments     155     74     72  

  Other equity investments           30     8  
                     

  Total Investment           104     80  
                     

Total companies less than 5% owned

        $ 2,317,856   $ 1,858,581  
                     

Total private finance (138 portfolio investments)

        $ 4,877,392   $ 3,399,063  
                     

Commercial Real Estate Finance
(in thousands, except number of loans)

 
   
   
  December 31, 2008  
 
   
   
  (unaudited)  
 
  Stated Interest
Rate Ranges
  Number of
Loans
 
 
  Cost   Value  

Commercial Mortgage Loans

                       

  Up to 6.99%     4   $ 30,999   $ 30,537  

  7.00%–8.99%     1     644     580  

  9.00%–10.99%     1     6,465     6,465  

  11.00%–12.99%     1     10,469     9,391  

  15.00% and above     2     3,970     6,529  
                     

Total commercial mortgage loans(13)

            $ 52,547   $ 53,502  
                     

Real Estate Owned

            $ 18,201   $ 20,823  
                     

Equity Interests(2)—Companies more than 25% owned

            $ 14,755   $ 19,562  

Guarantees ($6,871)

                       

Standby Letter of Credit ($650)

                       

Total commercial real estate finance

            $ 85,503   $ 93,887  
                     

Total portfolio

            $ 4,962,895   $ 3,492,950  
                     

F-135



 
  Yield   Cost   Value  

Investments in Money Market and Other Securities

                   

SEI Daily Income Tr Prime Obligation Money Market Fund

    0.9 % $ 5   $ 5  

Columbia Treasury Reserves Fund

        12     12  

Other Money Market Funds

        270     270  
                 

Total

        $ 287   $ 287  
                 

(1)
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.

(2)
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.

(3)
Public company.

(4)
Non-U.S. company or principal place of business outside the U.S.

(5)
Non-registered investment company.

(6)
Loan or debt security is on non-accrual status and therefore is considered non-income producing.

(7)
Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated companies.

(8)
Crescent Equity Corp. holds investments in Crescent Hotels & Resorts, LLC and affiliates.

(10)
The fund is managed by Callidus Capital, a portfolio company of Allied Capital.

(11)
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations.

(12)
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.

(13)
Commercial mortgage loans totaling $7.7 million at value were on non-accrual status and therefore were considered non-income producing.

The accompanying notes are an integral part of these consolidated financial statements.

F-136



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS

December 31, 2007

(in thousands, except number of shares)

Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Companies More Than 25% Owned

                       

Alaris Consulting, LLC
(Business Services)

  Senior Loan
(16.5%, Due 12/05 - 12/07)(6)
Equity Interests
  $ 27,055   $

26,987

5,189
  $



 
                     

  Total Investment           32,176      
                     

  Guaranty ($1,100)                    

AllBridge Financial, LLC
(Asset Management)

  Equity Interests           7,800     7,800  
                     

  Total Investment           7,800     7,800  
                     

  Standby Letter of Credit ($30,000)                    

Allied Capital Senior Debt
Fund, L.P.(5)

 
Equity Interests (See Note 3)
         
31,800
   
32,811
 
 

(Private Debt Fund)

                       
                     

  Total Investment           31,800     32,811  
                     

Avborne, Inc.(7)
(Business Services)

  Preferred Stock (12,500 shares)
Common Stock (27,500 shares)
          611
    1,633
 
                     

  Total Investment           611     1,633  
                     

Avborne Heavy Maintenance, Inc.(7)
(Business Services)

  Preferred Stock (1,568 shares)
Common Stock (2,750 shares)
          2,401
    2,557
370
 
                     

  Total Investment           2,401     2,927  
                     

  Guaranty ($2,401)                    

Aviation Properties Corporation
(Business Services)

  Common Stock (100 shares)           65      
                     

  Total Investment           65      
                     

  Standby Letters of Credit ($1,000)                    

Border Foods, Inc.
(Consumer Products)

  Preferred Stock (100,000 shares)
Common Stock (148,838 shares)
          12,721
3,847
    4,648
 
                     

  Total Investment           16,568     4,648  
                     

Calder Capital Partners, LLC(5)
(Asset Management)

  Senior Loan (9.4%, Due 5/09)(6)
Equity Interests
    2,907     2,907
2,396
    3,035
3,559
 
                     

  Total Investment           5,303     6,594  
                     

Callidus Capital Corporation
(Asset Management)

  Subordinated Debt (18.0%, Due 10/08)
Common Stock (100 shares)
    6,871     6,871
2,067
    6,871
44,587
 
                     

  Total Investment           8,938     51,458  
                     

Ciena Capital LLC
(Financial Services)

  Class A Equity Interests (25.0%—See Note 3)(6)
Class B Equity Interests
Class C Equity Interests
   
99,044
   
99,044
119,436
109,301
   
68,609

 
                     

  Total Investment           327,781     68,609  
                     

                       

F-137


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

  Guaranty ($258,707—See Note 3)
Standby Letters of Credit ($18,000—See Note 3)
                   

CitiPostal Inc.

  Senior Loan (8.4%, Due 12/13)   $ 692   $ 679   $ 679  
 

(Business Services)

  Unitranche Debt (12.0%, Due 12/13)     50,852     50,597     50,597  

  Subordinated Debt (16.0%, Due 12/15)     8,049     8,049     8,049  

  Common Stock (37,024 shares)           12,726     12,726  
                     

  Total Investment           72,051     72,051  
                     

Coverall North America, Inc.

  Unitranche Debt (12.0%, Due 7/11)     35,054     34,923     34,923  
 

(Business Services)

  Subordinated Debt (15.0%, Due 7/11)     6,000     5,979     5,979  

  Common Stock (884,880 shares)           16,648     27,597  
                     

  Total Investment           57,550     68,499  
                     

CR Holding, Inc.

  Subordinated Debt (16.6%, Due 2/13)     40,956     40,812     40,812  
 

(Consumer Products)

  Common Stock (37,200,551 shares)           33,321     40,934  
                     

  Total Investment           74,133     81,746  
                     

Direct Capital Corporation

  Subordinated Debt (16.0%, Due 3/13)     39,184     39,030     39,030  
 

(Financial Services)

  Common Stock (2,097,234 shares)           19,250     6,906  
                     

  Total Investment           58,280     45,936  
                     

Financial Pacific Company

  Subordinated Debt (17.4%, Due 2/12 -     73,031     72,850     72,850  
 

(Financial Services)

  8/12)                    

  Preferred Stock (10,964 shares)           10,276     19,330  

  Common Stock (14,735 shares)           14,819     38,544  
                     

  Total Investment           97,945     130,724  
                     

ForeSite Towers, LLC

  Equity Interest               878  
 

(Tower Leasing)

                       
                     

  Total Investment               878  
                     

Global Communications, LLC

  Senior Loan (10.0%, Due 9/02)(6)     1,822     1,822     1,822  
 

(Business Services)

                       
                     

  Total Investment           1,822     1,822  
                     

Hot Stuff Foods, LLC

  Senior Loan (8.4%, Due 2/11-2/12)     50,940     50,752     50,752  
 

(Consumer Products)

  Subordinated Debt (12.1%, Due 8/12)     30,000     29,907     29,907  

  Subordinated Debt (15.4%, Due 2/13)(6)     52,373     52,150     1,337  

  Common Stock (1,147,453 shares)           56,187      
                     

  Total Investment           188,996     81,996  
                     

Huddle House, Inc.

  Subordinated Debt (15.0%, Due 12/12)     59,857     59,618     59,618  
 

(Retail)

  Common Stock (415,328 shares)           41,533     44,154  
                     

  Total Investment           101,151     103,772  
                     

Impact Innovations Group, LLC

  Equity Interests in Affiliate               320  
 

(Business Services)

                       
                     

  Total Investment               320  
                     

Insight Pharmaceuticals Corporation

  Subordinated Debt (15.0%, Due 9/12)     44,257     44,136     45,041  
 

(Consumer Products)

  Subordinated Debt (19.0%, Due 9/12)(6)     16,181     16,130     16,796  

  Preferred Stock (25,000 shares)           25,000     1,462  

  Common Stock (620,000 shares)           6,325      
                     

  Total Investment           91,591     63,299  
                     

                       

F-138


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Jakel, Inc.

  Subordinated Debt (15.5%, Due   $ 1,563   $ 1,563   $ 1,563  
 

(Industrial Products)

  3/08)(6)                    
                     

  Total Investment           1,563     1,563  
                     

Legacy Partners Group, Inc.

  Senior Loan (14.0%, Due 5/09)(6)     3,843     3,843     3,843  
 

(Business Services)

  Equity Interests           4,261     1,332  
                     

  Total Investment           8,104     5,175  
                     

Litterer Beteiligungs-GmbH(4)

  Subordinated Debt (8.0%, Due 12/08)     772     772     772  
 

(Business Services)

  Equity Interest           1,809     700  
                     

  Total Investment           2,581     1,472  
                     

MVL Group, Inc.

  Senior Loan (12.0%, Due 6/09 - 7/09)     30,674     30,639     30,639  
 

(Business Services)

  Subordinated Debt (14.5%, Due 6/09 - 7/09)     40,191     39,943     39,943  

  Common Stock (648,661 shares)           643     4,949  
                     

  Total Investment           71,225     75,531  
                     

Old Orchard Brands, LLC

  Subordinated Debt (18.0%, Due 7/14)     19,632     19,544     19,544  
 

(Consumer Products)

  Equity Interests           18,767     25,419  
                     

  Total Investment           38,311     44,963  
                     

Penn Detroit Diesel Allison, LLC

  Subordinated Debt (15.5%, Due 8/13)     39,331     39,180     39,180  
 

(Business Services)

  Equity Interests           21,128     37,965  
                     

  Total Investment           60,308     77,145  
                     

Powell Plant Farms, Inc.

  Senior Loan (15.0%, Due 12/07)(6)     1,350     1,350     1,534  
 

(Consumer Products)

                       
                     

  Total Investment           1,350     1,534  
                     

Service Champ, Inc.

  Subordinated Debt (15.5%, Due 4/12)     28,443     28,351     28,351  
 

(Business Services)

  Common Stock (63,888 shares)           13,662     26,292  
                     

  Total Investment           42,013     54,643  
                     

Staffing Partners Holding

                       
 

Company, Inc.
(Business Services)

  Subordinated Debt (13.5%, Due 1/07)(6)     509     509     223  
                     

  Total Investment           509     223  
                     

Startec Equity, LLC

  Equity Interests           190     430  
 

(Telecommunications)

                       
                     

  Total Investment           190     430  
                     

Sweet Traditions, Inc.
(Retail)

  Senior Loan (13.0%, Due 9/08 - 8/11)(6)     39,692     36,052     35,229  
 

  Preferred Stock (961 shares)           950      

  Common Stock (10,000 shares)           50      
                     

  Total Investment           37,052     35,229  
                     

Triview Investments, Inc.(8)

  Senior Loan (10.0%, Due 12/07)     433     433     433  
 

(Broadcasting & Cable/Business

  Subordinated Debt (12.9%, Due 1/10 -     43,157     42,977     42,977  
 

Services/Consumer Products)

  6/17)                    
 

  Subordinated Debt (12.5%, Due 11/07 - 3/08)(6)     1,400     1,400     1,583  

  Common Stock (202 shares)           120,638     83,453  
                     

  Total Investment         $ 165,448   $ 128,446  
                     

                       

F-139


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

  Guaranty ($900)                    

  Standby Letter of Credit ($200)                    

Unitranche Fund LLC

  Subordinated Certificates         $ 744   $ 744  
 

(Private Debt Fund)

  Equity Interests           1     1  
                     

  Total Investment           745     745  
                     

Worldwide Express Operations, LLC

  Subordinated Debt (14.0%, Due 2/14)   $ 2,845     2,670     2,670  
 

(Business Services)

  Equity Interests           12,900     21,516  

  Warrants           163     272  
                     

  Total Investment           15,733     24,458  
                     
 

Total companies more than 25% owned

           
$

1,622,094
 
$

1,279,080
 
                     

Companies 5% to 25% Owned

                       

10th Street, LLC

  Subordinated Debt (13.0%, Due 12/14)     20,774     20,645     20,645  
 

(Business Services)

  Equity Interests           446     1,100  
                     

  Total Investment           21,091     21,745  
                     

Advantage Sales & Marketing, Inc.

  Subordinated Debt (12.0%, Due 3/14)     155,432     154,854     154,854  
 

(Business Services)

  Equity Interests               10,973  
                     

  Total Investment           154,854     165,827  
                     

Air Medical Group Holdings LLC

  Senior Loan (7.8%, Due 3/11)     3,030     2,980     2,980  
 

(Healthcare Services)

  Equity Interests           3,470     10,800  
                     

  Total Investment           6,450     13,780  
                     

Alpine ESP Holdings, Inc.

  Preferred Stock (622 shares)           622     749  
 

(Business Services)

  Common Stock (13,513 shares)           14     262  
                     

  Total Investment           636     1,011  
                     

Amerex Group, LLC

  Subordinated Debt (12.0%, Due 1/13)     8,400     8,400     8,400  
 

(Consumer Products)

  Equity Interests           3,509     13,713  
                     

  Total Investment           11,909     22,113  
                     

BB&T Capital Partners/Windsor

                       

Mezzanine Fund, LLC(5)

  Equity Interests           11,739     11,467  
 

(Private Equity Fund)

                       
                     

  Total Investment           11,739     11,467  
                     

Becker Underwood, Inc.

  Subordinated Debt (14.5%, Due 8/12)     24,865     24,798     24,798  
 

(Industrial Products)

  Common Stock (5,073 shares)           5,813     4,190  
                     

  Total Investment           30,611     28,988  
                     

BI Incorporated

  Subordinated Debt (13.5%, Due 2/14)     30,615     30,499     30,499  
 

(Business Services)

  Common Stock (40,000 shares)           4,000     7,382  
                     

  Total Investment           34,499     37,881  
                     

Creative Group, Inc.

  Subordinated Debt (14.0%, Due     15,000     13,686     6,197  
 

(Business Services)

  9/13)(6)                    

  Common Stock (20,000 shares)                

  Warrant           1,387      
                     

  Total Investment           15,073     6,197  
                     

Drew Foam Companies, Inc.

  Preferred Stock (722 shares)           722     396  
 

(Business Services)

  Common Stock (7,287 shares)           7      
                     

  Total Investment           729     396  
                     

                       

F-140


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

MedBridge Healthcare, LLC

  Senior Loan (8.0%, Due 8/09)(6)   $ 7,164   $ 7,164   $ 7,164  
 

(Healthcare Services)

  Subordinated Debt (10.0%, Due 8/14)(6)     5,184     5,184     2,406  

  Convertible Subordinated Debt (2.0%, Due 8/14)(6)     2,970     984      

  Equity Interests           1,416      
                     

  Total Investment           14,748     9,570  
                     

MHF Logistical Solutions, Inc.

  Subordinated Debt (11.5%, Due     33,600     33,448     9,280  
 

(Business Services)

  6/12)(6)                    

  Subordinated Debt (18.0%, Due 6/13)(6)     11,211     11,154      

  Common Stock (20,934 shares)(12)           20,942      

  Warrants(12)                
                     

  Total Investment           65,544     9,280  
                     

Multi-Ad Services, Inc.

  Unitranche Debt (11.3%, Due 11/11)     19,800     19,704     19,704  
 

(Business Services)

  Equity Interests           2,000     940  
                     

  Total Investment           21,704     20,644  
                     

Progressive International

                       
 

Corporation

  Subordinated Debt (16.0%, Due 12/09)     1,557     1,545     1,545  
 

(Consumer Products)

  Preferred Stock (500 shares)           500     1,038  

  Common Stock (197 shares)           13     4,900  

  Warrants                
                     

  Total Investment           2,058     7,483  
                     

Regency Healthcare Group, LLC

  Unitranche Debt (11.1%, Due 6/12)     12,000     11,941     11,941  
 

(Healthcare Services)

  Equity Interests           1,500     1,681  
                     

  Total Investment           13,441     13,622  
                     

SGT India Private Limited(4)

  Common Stock (150,596 shares)           4,098     3,075  
 

(Business Services)

                       
                     

  Total Investment           4,098     3,075  
                     

Soteria Imaging Services, LLC

  Subordinated Debt (12.0%, Due 11/10)     14,500     13,744     13,744  
 

(Healthcare Services)

  Equity Interests           2,170     2,686  
                     

  Total Investment           15,914     16,430  
                     

Universal Environmental
Services, LLC

 
Equity Interests
         
1,810
   
 
 

(Business Services)

                       
                     

  Total Investment           1,810      
                     
 

Total companies 5% to 25% owned

            $ 426,908   $ 389,509  
                     

Companies Less Than 5% Owned

                       

3SI Security Systems, Inc.

  Subordinated Debt (14.5%, Due 8/13)   $ 27,937   $ 27,837   $ 27,837  
 

(Consumer Products)

                       
                     

  Total Investment           27,837     27,837  
                     

AgData, L.P.

  Senior Loan (10.3%, Due 7/12)     843     815     815  
 

(Consumer Services)

                       
                     

  Total Investment           815     815  
                     

Axium Healthcare Pharmacy, Inc.

  Senior Loan (12.5%, Due 12/12)     2,600     2,567     2,567  
 

(Healthcare Services)

  Unitranche Debt (12.5%, Due 12/12)     8,500     8,463     8,463  

  Common Stock (26,500 shares)           2,650     1,097  
                     

  Total Investment           13,680     12,127  
                     

                       

F-141


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Baird Capital Partners IV Limited

                       
 

Partnership(5)

  Limited Partnership Interest         $ 2,234   $ 2,114  
 

(Private Equity Fund)

                       
                     

  Total Investment           2,234     2,114  
                     

BenefitMall, Inc.

  Subordinated Debt (14.9%, Due   $ 82,167     81,930     81,930  
 

(Business Services)

  10/13-10/14)                    

  Common Stock (45,528,000 shares)(12)           45,528     82,404  

  Warrants(12)                

  Standby Letters of Credit ($3,961)                    
                     

  Total Investment           127,458     164,334  
                     

Broadcast Electronics, Inc.

  Senior Loan (9.0%, Due 7/12)(6)     4,913     4,884     3,273  
 

(Business Services)

                       
                     

  Total Investment           4,884     3,273  
                     

Bushnell, Inc.

  Subordinated Debt (11.3%, Due 2/14)     41,325     39,821     39,821  
 

(Consumer Products)

                       
                     

  Total Investment           39,821     39,821  
                     

Callidus Debt Partners

                       
 

CDO Fund I, Ltd.(4)(10)

  Class C Notes (12.9%, Due 12/13)     18,800     18,929     18,988  
 

(CDO)

  Class D Notes (17.0%, Due 12/13)     9,400     9,465     9,494  
                     

  Total Investment           28,394     28,482  
                     

Callidus Debt Partners

                       
 

CLO Fund III, Ltd.(4)(10)

  Preferred Shares (23,600,000 shares,           21,783     19,999  
 

(CLO)

  12.9%)(11)                    
                     

  Total Investment           21,783     19,999  
                     

Callidus Debt Partners

                       
 

CLO Fund IV, Ltd.(4)(10)

  Income Notes (14.8%)(11)           12,298     11,290  
 

(CLO)

                       
                     

  Total Investment           12,298     11,290  
                     

Callidus Debt Partners

                       
 

CLO Fund V, Ltd.(4)(10)

  Income Notes (20.3%)(11)           13,977     14,658  
 

(CLO)

                       
                     

  Total Investment           13,977     14,658  
                     

Callidus Debt Partners

                       
 

CLO Fund VI, Ltd.(4)(10)

  Class D Notes (11.3%, Due 10/21)     5,000     4,329     4,329  
 

(CLO)

  Income Notes (19.3%)(11)           26,985     26,985  
                     

  Total Investment           31,314     31,314  
                     

Callidus Debt Partners(4)(10)

                       
 

CLO Fund VII, Ltd.

  Income Notes (16.6%)(11)           22,113     22,113  
 

(CLO)

                       
                     

  Total Investment           22,113     22,113  
                     

Callidus MAPS CLO

                       
 

Fund I LLC(10)

  Class E Notes (10.4%, Due 12/17)     17,000     17,000     16,119  
 

(CLO)

  Income Notes (5.6%)(11)           49,252     36,085  
                     

  Total Investment           66,252     52,204  
                     

F-142


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Callidus MAPS CLO

                       
 

Fund II, Ltd.(4)(10)
(CLO)

  Income Notes (14.7%)(11)         $ 18,753   $ 18,753  
                     

  Total Investment           18,753     18,753  
                     

Camden Partners Strategic

                       
 

Fund II, L.P.(5)

  Limited Partnership Interest           997     1,350  
 

(Private Equity Fund)

                       
                     

  Total Investment           997     1,350  
                     

Carlisle Wide Plank Floors, Inc.

  Senior Loan (9.8%, Due 6/11)   $ 500     497     497  
 

(Consumer Products)

  Unitranche Debt (10.0%, Due 6/11)     3,161     3,129     3,129  

  Preferred Stock (400,000 Shares)           400     507  
                     

  Total Investment           4,026     4,133  
                     

Catterton Partners V, L.P.(5)

  Limited Partnership Interest           3,624     2,952  
 

(Private Equity Fund)

                       
                     

  Total Investment           3,624     2,952  
                     

Catterton Partners VI, L.P.(5)

  Limited Partnership Interest           2,259     2,103  
 

(Private Equity Fund)

                       
                     

  Total Investment           2,259     2,103  
                     

Centre Capital Investors IV, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           2,215     2,276  
                     

  Total Investment           2,215     2,276  
                     

Centre Capital Investors V, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           628     628  
                     

  Total Investment           628     628  
                     

CK Franchising, Inc.
(Consumer Services)

  Senior Loan (8.7%, Due 7/12)
Subordinated Debt (12.3%, Due 7/12 - 7/17)
Preferred Stock (1,486,004 shares)
Common Stock (8,793,408 shares)
    9,000
21,000
    8,911
20,908
1,486
8,793
    8,911
20,908
1,586
8,654
 
                     

  Total Investment           40,098     40,059  
                     

Commercial Credit Group, Inc.
(Financial Services)

  Subordinated Debt (14.8%, Due 2/11)
Preferred Stock (74,978 shares)
Warrants
    12,000     12,023
18,018
    12,023
19,421
 
                     

  Total Investment           30,041     31,444  
                     

Community Education Centers, Inc.
(Education Services)

  Subordinated Debt (13.5%, Due 11/13)     35,011     34,936     34,936  
                     

  Total Investment           34,936     34,936  
                     

Component Hardware Group, Inc.
(Industrial Products)

  Subordinated Debt (13.5%, Due 1/13)     18,432     18,363     18,363  
                     

  Total Investment           18,363     18,363  
                     

Cook Inlet Alternative Risk, LLC
(Business Services)

  Unitranche Debt (10.8%, Due 4/13)
Equity Interests
    95,000     94,530
640
    94,530
1,696
 
                     

  Total Investment           95,170     96,226  
                     

F-143


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Cortec Group Fund IV, L.P.(5)
(Private Equity)

  Limited Partnership Interest         $ 3,383   $ 2,922  
                     

  Total Investment           3,383     2,922  
                     

Diversified Mercury Communications, LLC
(Business Services)

  Senior Loan (8.5%, Due 3/13)   $ 233     217     217  
                     

  Total Investment           217     217  
                     

Digital VideoStream, LLC
(Business Services)

  Unitranche Debt (11.0%, Due 2/12)
Convertible Subordinated Debt (10.0%, Due 2/16)
    17,213
4,118
    17,128
4,103
    17,128
5,397
 
                     

  Total Investment           21,231     22,525  
                     

DirectBuy Holdings, Inc.
(Consumer Products)

  Subordinated Debt (14.5%, Due 5/13)
Equity Interests
    75,000     74,631
8,000
    74,631
8,000
 
                     

  Total Investment           82,631     82,631  
                     

Distant Lands Trading Co.
(Consumer Products)

  Senior Loan (10.3%, Due 11/11)
Unitranche Debt (11.0%, Due 11/11)
Common Stock (4,000 shares)
    10,000
42,375
    9,966
42,226
4,000
    9,966
42,226
2,645
 
                     

  Total Investment           56,192     54,837  
                     

Driven Brands, Inc.

                       
 

d/b/a Meineke and Econo Lube
(Consumer Services)

  Senior Loan (8.7%, Due 6/11)
Subordinated Debt (12.1%, Due 6/12 - 6/13)
Common Stock (11,675,331 shares)(12)
Warrants(12)
    37,070
83,000
    36,951
82,754
29,455
    36,951
82,754
15,977
 
                     

  Total Investment           149,160     135,682  
                     

Dryden XVIII Leveraged Loan 2007

                       
 

Limited(4)
(CLO)

  Subordinated Debt (9.7%, Due 10/19)
Income Notes (14.2%)(11)
    9,000     7,406
21,940
    7,406
21,940
 
                     

  Total Investment           29,346     29,346  
                     

Dynamic India Fund IV(4)(5)
(Private Equity Fund)

  Equity Interests           6,050     6,215  
                     

  Total Investment           6,050     6,215  
                     

EarthColor, Inc.
(Business Services)

  Subordinated Debt (15.0%, Due 11/13)
Common Stock (73,540 shares)(12)
Warrants(12)
    127,000     126,463
73,540
    126,463
62,675
 
                     

  Total Investment           200,003     189,138  
                     

eCentury Capital Partners, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           6,899     2,176  
                     

  Total Investment           6,899     2,176  
                     

eInstruction Corporation
(Education Services)

  Subordinated Debt (13.5%, Due 7/14-1/15)
Common Stock (2,406 shares)
    47,000     46,765
2,500
    46,765
2,500
 
                     

  Total Investment           49,265     49,265  
                     

F-144


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Farley's & Sathers Candy

                       
 

Company, Inc.
(Consumer Products)

  Subordinated Debt (13.7%, Due 3/11)   $ 18,000   $ 17,932   $ 17,932  
                     

  Total Investment           17,932     17,932  
                     

FCP-BHI Holdings, LLC

                       
 

d/b/a Bojangles'
(Retail)

  Subordinated Debt (12.8%, Due 9/13)
Equity Interests
    24,000     23,887
1,000
    23,887
998
 
                     

  Total Investment           24,887     24,885  
                     

Fidus Mezzanine Capital, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           6,357     6,357  
                     

  Total Investment           6,357     6,357  
                     

Frozen Specialties, Inc.
(Consumer Products)

  Warrants           435     229  
                     

  Total Investment           435     229  
                     

Garden Ridge Corporation
(Retail)

  Subordinated Debt (7.0%, Due 5/12)(6)     20,500     20,500     20,500  
                     

  Total Investment           20,500     20,500  
                     

Geotrace Technologies, Inc.
(Energy Services)

  Subordinated Debt (10.0%, Due 6/09)
Warrants
    6,772     6,616
2,350
    6,616
2,993
 
                     

  Total Investment           8,966     9,609  
                     

Gilchrist & Soames, Inc.
(Consumer Products)

  Senior Loan (9.0%, Due 10/13)
Subordinated Debt (13.4%, Due 10/13)
    20,000
25,800
    19,954
25,676
    19,954
25,676
 
                     

  Total Investment           45,630     45,630  
                     

Grotech Partners, VI, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           8,808     8,252  
                     

  Total Investment           8,808     8,252  
                     

Havco Wood Products LLC
(Industrial Products)

  Senior Loan (9.7%, Due 8/11)
Unitranche Debt (11.5%, Due 8/11)
Equity Interests
    600
5,100
    585
4,248
1,055
    585
4,248
3,192
 
                     

  Total Investment           5,888     8,025  
                     

Haven Eldercare of New

                       
 

England, LLC
(Healthcare Services)

  Subordinated Debt (12.0%, Due 8/09)(6)     1,927     1,927      
                     

  Total Investment           1,927      
                     

Higginbotham Insurance

                       
 

Agency, Inc.
(Business Services)

  Senior Loan (7.7%, Due 8/12)
Subordinated Debt (13.5%, Due 8/13 - 8/14)
Common Stock (23,926 shares)(12)
Warrant(12)
    15,033
46,356
    14,942
46,136
23,926
    14,942
46,136
23,868
 
                     

  Total Investment           85,004     84,946  
                     

The Hillman Companies, Inc.(3)
(Consumer Products)

  Subordinated Debt (10.0%, Due 9/11)     44,580     44,458     44,458  
                     

  Total Investment           44,458     44,458  
                     

F-145


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

The Homax Group, Inc.
(Consumer Products)

  Senior Loan (8.7%, Due 10/12)
Subordinated Debt (12.0%, Due 4/14)
Preferred Stock (89 shares)
Common Stock (28 shares)
Warrants
  $
10,969
14,000
  $



10,969
13,244
89
6
1,106
  $



10,969
13,244
13

194
 
                     

  Total Investment           25,414     24,420  
                     

Ideal Snacks Corporation
(Consumer Products)

  Senior Loan (9.0%, Due 6/10])     288     288     288  
                     

  Total Investment           288     288  
                     

Integrity Interactive Corporation
(Business Services)

  Unitranche Debt (10.5%, Due 2/12)     12,193     12,095     12,095  
                     

  Total Investment           12,095     12,095  
                     

International Fiber Corporation
(Industrial Products)

  Subordinated Debt (14.0%, Due 6/12)
Preferred Stock (25,000 shares)
    24,572     24,476
2,500
    24,476
2,194
 
                     

  Total Investment           26,976     26,670  
                     

Jones Stephens Corporation
(Consumer Products)

  Senior Loan (8.8%, Due 9/12)     5,537     5,525     5,525  
                     

  Total Investment           5,525     5,525  
                     

Knightsbridge CLO 2007-1 Ltd.(4)
(CLO)

  Subordinated Debt (14.1%, Due 1/22)
Income Notes (15.2%)(11)
    22,000     22,000
31,211
    22,000
31,211
 
                     

  Total Investment           53,211     53,211  
                     

Kodiak Fund LP(5)
(Private Equity Fund

  Equity Interests           9,423     2,853  
                     

  Total Investment           9,423     2,853  
                     

Line-X, Inc.
(Consumer Products)

  Senior Loan (12.0%, Due 8/11)
Unitranche Debt (12.0% Due 8/11)
    900
48,198
    885
48,039
    885
42,784
 
                     

  Total Investment           48,924     43,669  
                     

  Standby Letter of Credit ($1,500)                    

MedAssets, Inc.(3)
(Business Services)

  Common Stock (224,817 shares)           2,049     6,652  
                     

  Total Investment           2,049     6,652  
                     

Mid-Atlantic Venture Fund IV, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           6,975     1,791  
                     

  Total Investment           6,975     1,791  
                     

Milestone AV Technologies, Inc.
(Business Services)

  Subordinated Debt (11.3%, Due 6/13)     37,500     37,500     36,750  
                     

  Total Investment           37,500     36,750  
                     

NetShape Technologies, Inc.
(Industrial Products)

  Senior Loan (8.6%, Due 2/13)     5,802     5,773     5,773  
                     

  Total Investment           5,773     5,773  
                     

F-146


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Network Hardware Resale, Inc.
(Business Services)

  Unitranche Debt (10.5%, Due 12/11)
Convertible Subordinated Debt (9.8%, Due 12/15)
  $
20,512
13,242
  $
20,614
13,302
  $
20,614
15,586
 
                     

  Total Investment           33,916     36,200  
                     

Norwesco, Inc.
(Industrial Products)

  Subordinated Debt (12.7%, Due 1/12 - 7/12)
Common Stock (559,603 shares)(12)
Warrants(12)
    82,924     82,674
38,313
    82,674
117,831
 
                     

  Total Investment           120,987     200,505  
                     

Novak Biddle Venture Partners

                       
 

III, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           1,910     1,256  
                     

  Total Investment           1,910     1,256  
                     

Oahu Waste Services, Inc.
(Business Services)

  Stock Appreciation Rights           239     998  
                     

  Total Investment           239     998  
                     

Odyssey Investment Partners Fund

                       
 

III, LP(5)
(Private Equity Fund)

  Limited Partnership Interest           2,276     2,567  
                     

  Total Investment           2,276     2,567  
                     

Pangaea CLO 2007-1 Ltd.(4)
(CLO)

  Subordinated Debt (10.2%, Due 10/21)     15,000     11,570     11,570  
                     

  Total Investment           11,570     11,570  
                     

Passport Health

                       
 

Communications, Inc.
(Healthcare Services)

  Preferred Stock (651,381 shares)
Common Stock (19,680 shares)
          2,000
48
    2,433
7
 
                     

  Total Investment           2,048     2,440  
                     

PC Helps Support, LLC
(Business Services)

  Senior Loan (8.9%, Due 12/13)
Subordinated Debt (13.3%, Due 12/13)
    20,000
30,895
    20,000
30,743
    20,000
30,743
 
                     

  Total Investment           50,743     50,743  
                     

Pendum, Inc.
(Business Services)

  Subordinated Debt (17.0%, Due 1/11)(6)
Preferred Stock (82,715 shares)
Warrants
    34,028     34,028

   

 
                     

  Total Investment           34,028      
                     

Performant Financial Corporation
(Business Services)

  Common Stock (478,816 shares)           734      
                     

  Total Investment           734      
                     

PharMEDium Healthcare

                       
 

Corporation
(Healthcare Services)

  Senior Loan (8.6%, Due 10/13)     19,577     19,577     19,577  
                     

  Total Investment           19,577     19,577  
                     

Postle Aluminum Company, LLC
(Industrial Products)

  Unitranche Debt (11.0%, Due 10/12)
Equity Interests
    61,500     61,252
2,500
    61,252
3,092
 
                     

  Total Investment           63,752     64,344  
                     

F-147


Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Pro Mach, Inc.
(Industrial Products)

  Subordinated Debt (13.0%, Due 6/12)
Equity Interests
  $ 14,562   $
14,506
1,500
  $
14,506
1,596
 
                     

  Total Investment           16,006     16,102  
                     

Promo Works, LLC
(Business Services)

  Unitranche Debt (10.3%, Due 12/11)
Guaranty ($600)
    26,215     26,006     26,006  
                     

  Total Investment           26,006     26,006  
                     

Reed Group, Ltd.
(Healthcare Services)

  Senior Loan (8.7%, Due 12/13)
Subordinated Debt (13.8%, Due 12/13)
Equity Interests
    21,000
18,000
    20,970
17,910
1,800
    20,970
17,910
1,800
 
                     

  Total Investment           40,680     40,680  
                     

S.B. Restaurant Company
(Retail)

  Unitranche Debt (9.8%, Due 4/11)
Preferred Stock (54,125 shares)
Warrants
Standby Letters of Credit ($2,540)
    34,001     33,733
135
619
    33,733
135
2,095
 
                     

  Total Investment           34,487     35,963  
                     

SBBUT, LLC
(Consumer Products)

  Equity Interests                
                     

  Total Investment                
                     

Service Center Metals, LLC
(Industrial Products)

  Subordinated Debt (15.5%, Due 9/11)
Equity Interests
    5,000     4,981
313
    4,981
343
 
                     

  Total Investment           5,294     5,324  
                     

Snow Phipps Group, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           2,288     2,288  
                     

  Total Investment           2,288     2,288  
                     

SPP Mezzanine Funding, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           2,268     1,942  
                     

  Total Investment           2,268     1,942  
                     

SPP Mezzanine Funding II, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           4,077     3,731  
                     

  Total Investment           4,077     3,731  
                     

Stag-Parkway, Inc.
(Business Services)

  Unitranche Debt (10.8%, Due 7/12)     51,000     50,810     50,810  
                     

  Total Investment           50,810     50,810  
                     

STS Operating, Inc.
(Industrial Products)

  Subordinated Debt (11.0%, Due 1/13)     30,386     30,273     30,273  
                     

  Total Investment           30,273     30,273  
                     

Summit Energy Services, Inc.
(Business Services)

  Senior Loan (8.5%, Due 8/13)
Subordinated Debt (11.6%, Due 8/13)
Common Stock (89,406 shares)
    24,239
35,765
    24,239
35,596
2,000
    23,512
35,596
1,995
 
                     

  Total Investment           61,835     61,103  
                     

Tappan Wire & Cable Inc.
(Business Services)

  Unitranche Debt (15.0%, Due 8/14)
Common Stock (15,000 shares)(12)
Warrant(12)
    24,100     23,975
2,250
    23,975
5,810
 
                     

  Total Investment           26,225     29,785  
                     

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Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

The Step2 Company, LLC
(Consumer Products)

  Unitranche Debt (11.0%, Due 4/12)
Equity Interests
  $ 96,041   $
95,693
2,483
  $
95,693
2,987
 
                     

  Total Investment           98,176     98,680  
                     

Tradesmen International, Inc.
(Business Services)

  Subordinated Debt (12.0%, Due 12/12)     49,124     48,431     48,431  
                     

  Total Investment           48,431     48,431  
                     

TransAmerican Auto Parts, LLC
(Consumer Products)

  Subordinated Debt (14.0%, Due 11/12)
Equity Interests
    24,076     23,907
1,198
    23,907
1,014
 
                     

  Total Investment           25,105     24,921  
                     

Trover Solutions, Inc.
(Business Services)

  Subordinated Debt (12.0%, Due 11/12)     60,000     59,740     59,740  
                     

  Total Investment           59,740     59,740  
                     

Universal Air Filter Company
(Industrial Products)

  Subordinated Debt (12.0%, Due 11/12)     14,750     14,688     14,688  
                     

  Total Investment           14,688     14,688  
                     

Updata Venture Partners II, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           4,465     4,306  
                     

  Total Investment           4,465     4,306  
                     

Venturehouse-Cibernet

                       
 

Investors, LLC
(Business Services)

  Equity Interest               54  
                     

  Total Investment               54  
                     

Venturehouse Group, LLC(5)
(Private Equity Fund)

  Equity Interest               613  
                     

  Total Investment               613  
                     

VICORP Restaurants, Inc.
(Retail)

  Warrants           33      
                     

  Total Investment           33      
                     

Walker Investment

                       
 

Fund II, LLLP(5)
(Private Equity Fund)

  Limited Partnership Interest           1,330      
                     

  Total Investment           1,330      
                     

WMA Equity Corporation and Affiliates

                       
 

d/b/a Wear Me Apparel
(Consumer Products)

  Subordinated Debt (13.6%, Due 4/13)
Subordinated Debt (9.0%, Due 4/14)(6)
Common Stock (100 shares)
    125,000
13,033
    124,010
13,033
46,046
    124,010
13,302
13,726
 
                     

  Total Investment           183,089     151,038  
                     

Webster Capital II, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           897     897  
                     

  Total Investment           897     897  
                     

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Private Finance
Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Woodstream Corporation
(Consumer Products)

  Subordinated Debt (12.0%, Due 2/15)
Common Stock (7,500 shares)
  $ 90,000   $
89,574
7,500
  $
89,574
7,482
 
                     

  Total Investment           97,074     97,056  
                     

York Insurance Services Group, Inc.
(Business Services)

  Subordinated Debt (14.5%, Due 1/14)
Common Stock (15,000 shares)
    45,141     44,966
1,500
    44,966
1,995
 
                     

  Total Investment           46,466     46,961  
                     

Other companies

  Other debt investments
Other equity investments
    159     57
8
    62
 
                     

  Total Investment           65     62  
                     
 

Total companies less than 5% owned

            $ 2,994,880   $ 2,990,732  
                     
 

Total private finance (156 portfolio investments)

        $ 5,043,882   $ 4,659,321  
                     

Commercial Real Estate Finance
(in thousands, except number of loans)

 
   
   
  December 31, 2007  
 
  Stated Interest
Rate Ranges
  Number of
Loans
 
 
  Cost   Value  

Commercial Mortgage Loans

                       

  Up to 6.99%     3   $ 20,361   $ 19,842  

  7.00%–8.99%     8     22,768     22,768  

  9.00%–10.99%     3     8,372     8,372  

  11.00%–12.99%     1     10,456     10,456  

  15.00% and above     2     3,970     3,970  
                     

Total commercial mortgage loans(13)

        17   $ 65,927   $ 65,408  
                     

Real Estate Owned

            $ 15,272   $ 21,253  
                     

Equity Interests(2)—Companies more than 25% owned

            $ 15,743   $ 34,539  

Guarantees ($6,871)

                       

Standby Letter of Credit ($1,295)

                       

Total commercial real estate finance

            $ 96,942   $ 121,200  
                     

Total portfolio

            $ 5,140,824   $ 4,780,521  
                     

 

 
  Yield   Cost   Value  

Investments in Money Market and Other Securities

                   

American Beacon Money Market Select FD Fund

    4.5%   $ 126,910   $ 126,910  

American Beacon Money Market Fund

    4.8%     40,163     40,163  

SEI Daily Income Tr Prime Obligation Money Market Fund

    4.9%     34,143     34,143  

Columbia Money Market Reserves Fund

    4.6%     6     6  
                 

Total

        $ 201,222   $ 201,222  
                 

(1)
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.

(2)
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.

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(3)
Public company.

(4)
Non-U.S. company or principal place of business outside the U.S.

(5)
Non-registered investment company.

(6)
Loan or debt security is on non-accrual status and therefore is considered non-income producing.

(7)
Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated companies.

(8)
Triview Investments, Inc. had a cost basis of $165.4 million and holds investments in Longview Cable & Data, LLC (Broadcasting & Cable) with a value of $7.0 million, Triax Holdings, LLC (Consumer Products) with a value of $62.0 million, and Crescent Hotels & Resorts, LLC and affiliates (Business Services) with a value of $59.4 million, for a total value of $128.4 million.

(10)
The fund is managed by Callidus Capital, a portfolio company of Allied Capital.

(11)
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations.

(12)
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.

(13)
Commercial mortgage loans totaling $14.3 million at value were on non-accrual status and therefore were considered non-income producing.

The accompanying notes are an integral part of these consolidated financial statements.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.   Organization and Other Matters

              Allied Capital Corporation, a Maryland corporation, is a closed-end, non-diversified management investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940 ("1940 Act"). Allied Capital Corporation ("ACC") has a real estate investment trust subsidiary, Allied Capital REIT, Inc. ("Allied REIT"), and several subsidiaries that are single member limited liability companies established for specific purposes including holding real estate properties. ACC also has a subsidiary, A.C. Corporation ("AC Corp"), that generally provides diligence and structuring services, as well as transaction, management, consulting, and other services, including underwriting and arranging senior loans, to the Company, its portfolio companies and its managed funds.

              ACC and its subsidiaries, collectively, are referred to as the "Company." The Company consolidates the results of its subsidiaries for financial reporting purposes.

              Pursuant to Article 6 of Regulation S-X, the financial results of the Company's portfolio investments are not consolidated in the Company's financial statements. Portfolio investments are held for purposes of deriving investment income and future capital gains.

              The investment objective of the Company is to achieve current income and capital gains. In order to achieve this objective, the Company has primarily invested in debt and equity securities of private companies in a variety of industries.

              The Company experienced a significant reduction in its net worth during the second half of 2008, primarily resulting from net unrealized depreciation on its portfolio, which reflects market conditions. As a result, on December 30, 2008, the Company entered into amendments relating to its private notes and revolving line of credit, including amendments which added new covenants. The amendments are more fully described in Note 4 to the consolidated financial statements.

              In January 2009 the Company re-opened discussions with the revolving line of credit lenders (the "Lenders") and the private noteholders (the "Noteholders") to seek relief under certain terms of both the revolving credit facility and the private notes due to a then-expected covenant default. It was subsequently determined that at December 31, 2008 the Company's asset coverage was less than the 200% required by the revolving credit facility and the private notes. Asset coverage generally refers to the percentage resulting from assets less accounts payable and other liabilities, divided by total debt. These discussions are continuing and the Company has expanded the discussions to encompass a more comprehensive restructuring of these debt agreements to provide long-term operational flexibility. As a result of these more comprehensive discussions, the Company has not completed the documents contemplated by the December 30, 2008 amendments to the revolving credit facility and private notes, which were to include a grant of a first lien security interest on substantially all of the Company's assets. Consequently, the administrative agent for the revolving credit facility has notified the Company that an event of default has occurred pursuant to the revolving credit facility. An event of default under the revolving credit facility constitutes an event of default under the private notes.

              Pursuant to the 1940 Act, the Company is not permitted to issue indebtedness unless immediately after such issuance the Company has asset coverage of all outstanding indebtedness of at least 200%. The Company's publicly issued unsecured notes payable require the Company to comply with this provision of the 1940 Act. At December 31, 2008, the Company's asset coverage ratio was 188%, which is less than the 200% requirement. As a result under the publicly issued unsecured notes

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payable, the Company will not be able to issue indebtedness until such time as its asset coverage returns to at least 200%. The Company has not experienced any default or cross default with respect to the publicly issued unsecured notes payable.

              The existence of an event of default under the revolving credit facility and private notes restricts the Company from borrowing or obtaining letters of credit under its revolving credit facility, and from declaring dividends or other distributions to the Company's shareholders. Pursuant to the terms of the revolving credit facility, during the continuance of an event of default, the applicable spread on any borrowings outstanding and fees on any letters of credit outstanding under the revolving credit facility increase by up to 200 basis points. Pursuant to the terms of the private notes, during the continuance of an event of default, the rate of interest borne by the private notes increases by 200 basis points.

              Neither the Lenders nor the Noteholders have accelerated repayment of the Company's obligations; however, the occurrence of an event of default permits the administrative agent for the Lenders, or the holders of more than 51% of the commitments under the revolving credit facility, to accelerate repayment of all amounts due, to terminate commitments thereunder, and to require the Company to provide cash collateral equal to the face amount of all outstanding letters of credit. Pursuant to the terms of the private notes, the occurrence of an event of default permits the holders of 51% or more of any issue of outstanding private notes to accelerate repayment of all amounts due thereunder.

              The Company's consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company does not have available cash resources sufficient to satisfy all of the obligations under these debt agreements should the lenders accelerate these obligations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company continues to seek a comprehensive restructuring of these debt agreements to provide long-term operational flexibility. In addition, the Company continues to sell assets to generate capital to repay debt. There can be no assurance that the Company's plans will be successful in addressing the liquidity uncertainties discussed above. In the event there is an acceleration of the amounts outstanding under the revolving credit facility or any issue of the private notes, it would cause the Company to evaluate other alternatives and would have a material adverse effect on the Company's operations. The accompanying consolidated financial statements do not include any adjustments that might result from these uncertainties.

Note 2.   Summary of Significant Accounting Policies

              The consolidated financial statements include the accounts of ACC and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 2007 and 2006 balances to conform with the 2008 financial statement presentation.

              The private finance portfolio and the interest and related portfolio income and net realized gains (losses) on the private finance portfolio are presented in three categories: companies more than 25% owned, which represent portfolio companies where the Company directly or indirectly owns more than 25% of the outstanding voting securities of such portfolio company or where the Company controls the portfolio company's board of directors and, therefore, are deemed controlled by the Company under the 1940 Act; companies owned 5% to 25%, which represent portfolio companies where the Company directly or indirectly owns 5% to 25% of the outstanding voting securities of such portfolio company or where the Company holds one or more seats on the portfolio company's board of directors and, therefore, are deemed to be an affiliated person under the 1940 Act; and companies less than 5% owned which represent portfolio companies where the Company directly or indirectly owns

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less than 5% of the outstanding voting securities of such portfolio company and where the Company has no other affiliations with such portfolio company. The interest and related portfolio income and net realized gains (losses) from the commercial real estate finance portfolio and other sources, including investments in money market and other securities, are included in the companies less than 5% owned category on the consolidated statement of operations.

              In the ordinary course of business, the Company enters into transactions with portfolio companies that may be considered related party transactions.

              The Company, as a BDC, has invested in illiquid securities including debt and equity securities of portfolio companies, CLO bonds and preferred shares/income notes, CDO bonds and investment funds. The Company's investments may be subject to certain restrictions on resale and generally have no established trading market. The Company values substantially all of its investments at fair value as determined in good faith by the Board of Directors in accordance with the Company's valuation policy and the provisions of the Investment Company Act of 1940 and FASB Statement No. 157, Fair Value Measurements ("SFAS 157" or the "Statement"). The Company determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. The Company's valuation policy considers the fact that no ready market exists for substantially all of the securities in which it invests and that fair value for its investments must typically be determined using unobservable inputs. The Company's valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio.

              The Company adopted SFAS 157 on a prospective basis in the first quarter of 2008. SFAS 157 requires the Company to assume that the portfolio investment is to be sold in the principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with the Statement, the Company has considered its principal market, or the market in which the Company exits its portfolio investments with the greatest volume and level of activity.

              The Company has determined that for its buyout investments, where the Company has control or could gain control through an option or warrant security, both the debt and equity securities of the portfolio investment would exit in the merger and acquisition ("M&A") market as the principal market generally through a sale or recapitalization of the portfolio company. The Company believes that the in-use premise of value (as defined in SFAS 157), which assumes the debt and equity securities are sold together, is appropriate as this would provide maximum proceeds to the seller. As a result, the Company will continue to use the enterprise value methodology to determine the fair value of these investments under SFAS 157. Enterprise value means the entire value of the company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. Enterprise value is determined using various factors, including cash flow from operations of the portfolio company, multiples at which private companies are bought and sold, and other pertinent factors, such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company's equity securities, liquidation events, or other events. The Company allocates the enterprise value to these securities in order of the legal priority of the securities.

              While the Company typically exits its securities upon the sale or recapitalization of the portfolio company in the M&A market, for investments in portfolio companies where the Company does not have control or the ability to gain control through an option or warrant security, the Company cannot typically control the exit of its investment into its principal market (the M&A market). As a result, in accordance with SFAS 157, the Company is required to determine the fair value of these investments assuming a sale of the individual investment (the in-exchange premise of value) in a hypothetical market to a hypothetical market participant. The Company continues to perform an

F-154



enterprise value analysis for the investments in this category to assess the credit risk of the loan or debt security and to determine the fair value of its equity investment in these portfolio companies. The determined equity values are generally discounted when the Company has a minority ownership position, restrictions on resale, specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other factors, which the Company believes would lead a market participant to discount such securities. For loan and debt securities, the Company performs a yield analysis assuming a hypothetical current sale of the investment. The yield analysis requires the Company to estimate the expected repayment date of the instrument and a market participant's required yield. The Company's estimate of the expected repayment date of a loan or debt security is generally shorter than the legal maturity of the instruments as the Company's loans have historically been repaid prior to the maturity date. The yield analysis considers changes in interest rates and changes in leverage levels of the loan or debt security as compared to the Company's estimates of market interest rates and leverage levels at the balance sheet date. Assuming the credit quality of the loan or debt security remains stable, the Company will use the value determined by the yield analysis as the fair value for that security. A change in the assumptions that the Company uses to estimate the fair value of its loans and debt securities using the yield analysis could have a material impact on the determination of fair value. If there is deterioration in credit quality or a loan or debt security is in workout status, the Company may consider other factors in determining the fair value of a loan or debt security, including the value attributable to the loan or debt security from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis.

              The Company's equity investments in private debt and equity funds are generally valued at such fund's net asset value, unless other factors lead to a determination of fair value at a different amount. The value of the Company's equity securities in public companies for which quoted prices in an active market are readily available is based on the closing public market price on the measurement date.

              The fair value of the Company's CLO bonds and preferred shares/income notes and CDO bonds ("CLO/CDO Assets") is generally based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar bonds and preferred shares/ income notes, when available. The Company recognizes unrealized appreciation or depreciation on its CLO/CDO Assets as comparable yields in the market change and/or based on changes in estimated cash flows resulting from changes in prepayment, re-investment or loss assumptions in the underlying collateral pool, or changes in redemption assumptions for the CLO/CDO Assets, if applicable. The Company determines the fair value of its CLO/CDO Assets on an individual security-by-security basis.

              The Company will record unrealized depreciation on investments when it determines that the fair value of a security is less than its cost basis, and will record unrealized appreciation when it determines that the fair value is greater than its cost basis. Because of the inherent uncertainty of valuation, the values determined at the measurement date may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the values determined at the measurement date.

              Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation primarily reflects the change in

F-155


portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. Net change in unrealized appreciation or depreciation also reflects the change in the value of U.S. Treasury bills, when applicable, and depreciation on accrued interest and dividends receivable and other assets where collection is doubtful.

              Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. For loans and debt securities with contractual payment-in-kind interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, the Company will not accrue payment-in-kind interest if the portfolio company valuation indicates that the payment-in-kind interest is not collectible. In general, interest is not accrued on loans and debt securities if the Company has doubt about interest collection or where the enterprise value of the portfolio company may not support further accrual. Loans in workout status generally do not accrue interest. In addition, interest may not accrue on loans or debt securities to portfolio companies that are more than 50% owned by the Company depending on such company's capital requirements.

              When the Company receives nominal cost warrants or free equity securities ("nominal cost equity"), the Company allocates its cost basis in its investment between its debt securities and its nominal cost equity at the time of origination. At that time, the original issue discount basis of the nominal cost equity is recorded by increasing the cost basis in the equity and decreasing the cost basis in the related debt securities. Loan origination fees, original issue discount, and market discount are capitalized and then amortized into interest income using a method that approximates the effective interest method. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as interest income and any unamortized original issue discount or market discount is recorded as a realized gain.

              The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, divided by (b) total loans and debt securities at value. The weighted average yield is computed as of the balance sheet date.

              The Company recognizes interest income on the CLO preferred shares/income notes using the effective interest method, based on the anticipated yield that is determined using the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the preferred shares/income notes from the date the estimated yield was changed. CLO and CDO bonds have stated interest rates. The weighted average yield on the CLO/CDO Assets is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective yield on the preferred shares/income notes, divided by (b) CLO/CDO Assets at value. The weighted average yields are computed as of the balance sheet date.

              Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are expected to be collected and to the extent that the Company has the option to receive the dividend in cash. Dividend income on common equity securities is recorded on the record date for private companies or on the ex-dividend date for publicly traded companies.

F-156


              Fee income includes fees for loan prepayment premiums, guarantees, commitments, and services rendered by the Company to portfolio companies and other third parties such as diligence, structuring, transaction services, management and consulting services, and other services. Loan prepayment premiums are recognized at the time of prepayment. Guaranty and commitment fees are generally recognized as income over the related period of the guaranty or commitment, respectively. Diligence, structuring, and transaction services fees are generally recognized as income when services are rendered or when the related transactions are completed. Management, consulting and other services fees are generally recognized as income as the services are rendered. Fees are not accrued if the Company has doubt about the collection of those fees.

              Guarantees meeting the characteristics described in FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others and issued or modified after December 31, 2002, are recognized at fair value at inception. Guarantees made on behalf of portfolio companies are considered in determining the fair value of the Company's investments. See Note 5.

              Debt financing costs are based on actual costs incurred in obtaining debt financing and are deferred and amortized as part of interest expense over the term of the related debt instrument using a method that approximates the effective interest method. Costs associated with the issuance of common stock are recorded as a reduction to the proceeds from the sale of common stock. Financing costs generally include underwriting, accounting and legal fees, and printing costs.

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

              The Company has a stock-based employee compensation plan. See Note 9. Effective January 1, 2006, the Company adopted the provisions of FASB Statement No. 123 (Revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R was adopted using the modified prospective method of application, which required the Company to recognize compensation costs on a prospective basis beginning January 1, 2006. Accordingly, the Company did not restate prior year financial statements. Under this method, the unamortized cost of previously awarded options that were unvested as of January 1, 2006, is recognized over the remaining service period in the statement of operations, using the fair value amounts determined for pro forma disclosure under SFAS 123R. With respect to options granted on or after January 1, 2006, compensation cost based on estimated grant date fair value is

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recognized over the related service period in the consolidated statement of operations. The stock option expense for the years ended December 31, 2008, 2007 and 2006, was as follows:

($ in millions, except per share amounts)
  2008   2007   2006  

Employee Stock Option Expense:

                   

Options granted:

                   

Previously awarded, unvested options as of January 1, 2006

  $ 3.9   $ 10.1   $ 13.2  

Options granted on or after January 1, 2006

    7.9     10.7     2.4  
               

Total options granted

    11.8     20.8     15.6  

Options cancelled in connection with tender offer (see Note 9)

        14.4      
               

Total employee stock option expense

  $ 11.8   $ 35.2   $ 15.6  
               

Per basic share

  $ 0.07   $ 0.23   $ 0.11  

Per diluted share

  $ 0.07   $ 0.23   $ 0.11  

              In addition to the employee stock option expense for options granted, administrative expense included $0.1 million, $0.2 million, and $0.2 million of expense for each of the years ended December 31, 2008, 2007 and 2006, respectively, related to options granted to directors during each year. Options were granted to non-officer directors in the second quarters of 2008, 2007 and 2006. Options granted to non-officer directors vest on the grant date and therefore, the full expense is recorded on the grant date.

              Options Granted.    The stock option expense shown in the tables above were based on the underlying value of the options granted by the Company. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model and expensed over the vesting period. The following weighted average assumptions were used to calculate the fair value of options granted during the years ended December 31, 2008, 2007, and 2006:

 
  2008   2007   2006  

Expected term (in years)

    5.0     5.0     5.0  

Risk-free interest rate

    2.8 %   4.6 %   4.8 %

Expected volatility

    27.8 %   26.4 %   29.1 %

Dividend yield

    8.5 %   8.9 %   9.0 %

Weighted average fair value per option

  $ 2.18   $ 2.96   $ 3.47  

              The expected term of the options granted represents the period of time that such options are expected to be outstanding. To determine the expected term of the options, the Company used historical data to estimate option exercise time frames, including considering employee terminations. The risk free rate was based on the U.S. Treasury bond yield curve at the date of grant consistent with the expected term. Expected volatilities were determined based on the historical volatility of the Company's common stock over a historical time period consistent with the expected term. The dividend yield was determined based on the Company's historical dividend yield over a historical time period consistent with the expected term.

              To determine the stock options expense for options granted, the calculated fair value of the options granted is applied to the options granted, net of assumed future option forfeitures. The Company estimates that the employee-related stock option expense for outstanding unvested options as of December 31, 2008, will be approximately $3.5 million, $3.9 million and $3.7 million for the years ended December 31, 2009, 2010 and 2011, respectively. This estimate does not include any expense related to stock option grants after December 31, 2008, as the fair value of those stock options will be determined at the time of grant. This estimate may change if the Company's assumptions related to future option forfeitures change. The aggregate total stock option expense remaining as of

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December 31, 2008, is expected to be recognized over an estimated weighted-average period of 1.53 years.

              Options Cancelled in Connection with Tender Offer.    As discussed in Note 9, the Company completed a tender offer in July 2007, whereby the Company accepted for cancellation 10.3 million vested options held by employees and non-officer directors of the Company in exchange for an option cancellation payment ("OCP"). The OCP was equal to the "in-the-money" value of the stock options cancelled, determined using the Weighted Average Market Price of $31.75, and was paid one-half in cash and one-half in unregistered shares of the Company's common stock. In accordance with the terms of the tender offer, the Weighted Average Market Price represented the volume weighted average price of the Company's common stock over the fifteen trading days preceding the first day of the offer period, or June 20, 2007. Because the Weighted Average Market Price at the commencement of the tender offer on June 20, 2007, was higher than the market price of the Company's common stock at the close of the offer on July 18, 2007, SFAS 123R required the Company to record a non-cash employee-related stock option expense of $14.4 million and administrative expense related to stock options cancelled that were held by non-officer directors of $0.4 million. The same amounts were recorded as an increase to additional paid-in capital and, therefore, had no effect on the Company's net asset value. The portion of the OCP paid in cash of $52.8 million reduced the Company's additional paid-in capital and therefore reduced the Company's net asset value. For income tax purposes, the Company's tax deduction resulting from the OCP will be similar to the tax deduction that would have resulted from an exercise of stock options in the market. Any tax deduction for the Company resulting from the OCP or an exercise of stock options in the market is limited by Section 162(m) of the Internal Revenue Code ("Code").

              The Company has complied with the requirements of the Code that are applicable to regulated investment companies ("RIC") and real estate investment trusts ("REIT"). ACC and any subsidiaries that qualify as a RIC or a REIT intend to distribute or retain through a deemed distribution all of their annual taxable income to shareholders; therefore, the Company has made no provision for income taxes exclusive of excise taxes for these entities.

              If the Company does not distribute at least 98% of its annual taxable income in the year earned, the Company will generally be required to pay an excise tax equal to 4% of the amount by which 98% of the Company's annual taxable income exceeds the distributions from such taxable income during the year earned. 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 from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.

              Income taxes for AC Corp are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

              Basic earnings per common share is calculated using the weighted average number of common shares outstanding for the year presented. Diluted earnings per common share reflects the potential dilution that could occur if options to issue common stock were exercised into common stock. Earnings per share is computed after subtracting dividends on preferred shares, if any.

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              The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

              The consolidated financial statements include portfolio investments at value of $3.5 billion and $4.8 billion at December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, 94% and 92%, respectively, of the Company's total assets represented portfolio investments whose fair values have been determined by the Board of Directors in good faith in the absence of readily available market values. Because of the inherent uncertainty of valuation, the Board of Directors' determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

              In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of this interpretation did not have a significant effect on the Company's consolidated financial position or its results of operations.

              In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has adopted this statement on a prospective basis beginning in the quarter ending March 31, 2008. The initial adoption of this statement did not have a material effect on the Company's consolidated financial statements.

              In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value. This statement applies to all reporting entities, and contains financial statement presentation and disclosure requirements for assets and liabilities reported at fair value as a consequence of the election. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company did not elect fair value measurement for assets or liabilities other than portfolio investments, which were already required to be measured at fair value, therefore, the adoption of this statement did not impact the Company's consolidated financial position or its results of operations.

              In October 2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. This FSP applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with Statement 157. This FSP clarifies the application of Statement 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value. The Company has applied the provisions of this FSP in determining the fair value of its portfolio investments at December 31, 2008. The application of the FSP did not have a material impact on the Company's consolidated financial position or its results of operations.

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Note 3.   Portfolio

              At December 31, 2008 and 2007, the private finance portfolio consisted of the following:

 
  2008   2007  
($ in millions)
  Cost   Value   Yield(1)   Cost   Value   Yield(1)  

Loans and debt securities:

                                     

Senior loans

  $ 556.9   $ 306.3     5.6 % $ 374.1   $ 344.3     7.7 %

Unitranche debt(2)

    527.5     456.4     12.0 %   659.2     653.9     11.5 %

Subordinated debt(3)

    2,300.1     1,829.1     12.9 %   2,576.4     2,416.4     12.8 %
                               

Total loans and debt securities(4)

    3,384.5     2,591.8     11.9 %   3,609.7     3,414.6     12.1 %

Equity securities:

                                     

Preferred shares/income notes of CLOs(5)

    248.2     179.2     16.4 %   218.3     203.0     14.6 %

Subordinated certificates in Unitranche Fund LLC(5)

    125.4     125.4     12.0 %   0.7     0.7     12.4 %

Other equity securities

    1,119.3     502.7           1,215.2     1,041.0        
                               

Total equity securities

    1,492.9     807.3           1,434.2     1,244.7        
                               

Total

  $ 4,877.4   $ 3,399.1         $ 5,043.9   $ 4,659.3        
                               

(1)
The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, divided by (b) total loans and debt securities at value. At December 31, 2007, the cost and value of subordinated debt included the Class A equity interests in Ciena Capital LLC, which were placed on non-accrual status during the fourth quarter of 2006. At December 31, 2008, senior loans included the senior secured loan to Ciena totaling $319.0 million at cost and $104.9 million at value, which was placed on non-accrual on the purchase date.
(2)
Unitranche debt is an investment that combines both senior and subordinated financing, generally in a first lien position.

(3)
Subordinated debt includes bonds in CLOs and in a CDO.

(4)
The total principal balance outstanding on loans and debt securities was $3,418.0 million and $3,639.6 million at December 31, 2008 and 2007, respectively. The difference between principal and cost primarily represents unamortized loan origination fees and costs, original issue discounts, and market discounts totaling $33.5 million and $29.9 million at December 31, 2008 and 2007, respectively.

(5)
Investments in the preferred shares/income notes of CLOs and the subordinated certificates in Unitranche Fund LLC earn a current return that is included in interest income in the accompanying consolidated statement of operations.

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              The Company's private finance investment activity principally involves providing financing through privately negotiated debt and equity investments. The Company's private finance debt and equity investments generally are issued by private companies and generally are illiquid and may be subject to certain restrictions on resale.

              The Company's private finance debt investments generally are structured as loans and debt securities that carry a relatively high fixed rate of interest, which may be combined with equity features, such as conversion privileges, or warrants or options to purchase a portion of the portfolio company's equity at a pre-determined strike price, which generally is a nominal price for warrants or options in a private company. The annual stated interest rate is only one factor in pricing the investment relative to the Company's rights and priority in the portfolio company's capital structure, and will vary depending on many factors, including if the Company has received nominal cost equity or other components of investment return, such as loan origination fees or market discount. The stated interest rate may include some component of contractual payment-in-kind interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity.

              At December 31, 2008 and 2007, 85% and 86%, respectively of the private finance loans and debt securities had a fixed rate of interest and 15% and 14%, respectively, had a floating rate of interest. Senior loans may carry a fixed rate of interest or a floating rate of interest, set as a spread over prime or LIBOR, and may require payments of both principal and interest throughout the life of the loan. Senior loans generally have contractual maturities of three to six years and interest is generally paid to the Company monthly or quarterly. Unitranche debt generally carries a fixed rate of interest. Unitranche debt generally requires payments of both principal and interest throughout the life of the loan. Unitranche debt generally has contractual maturities of five to six years and interest generally is paid to the Company quarterly. Subordinated debt generally carries a fixed rate of interest generally with contractual maturities of five to ten years and generally has interest-only payments in the early years and payments of both principal and interest in the later years, although maturities and principal amortization schedules may vary. Interest on subordinated debt generally is paid to the Company quarterly.

              Equity securities primarily consist of securities issued by private companies and may be subject to certain restrictions on their resale and are generally illiquid. The Company may make equity investments for minority stakes in portfolio companies or may receive equity features, such as nominal cost warrants. The Company also may invest in the equity (preferred and/or voting or non-voting common) of a portfolio company where the Company's equity ownership may represent a significant portion of the equity, but may or may not represent a controlling interest. If the Company invests in non-voting equity in a buyout investment, the Company generally has the option to acquire a controlling stake in the voting securities of the portfolio company at fair market value. The Company may incur costs associated with making buyout investments that will be included in the cost basis of the Company's equity investment. These include costs such as legal, accounting and other professional fees associated with diligence, referral and investment banking fees, and other costs. Equity securities generally do not produce a current return, but are held with the potential for investment appreciation and ultimate gain on sale.

              Ciena Capital LLC.    Ciena Capital LLC (f/k/a Business Loan Express, LLC) ("Ciena") has provided loans to commercial real estate owners and operators. Ciena has been a participant in the Small Business Administration's 7(a) Guaranteed Loan Program and its wholly-owned subsidiary is licensed by the SBA as a Small Business Lending Company ("SBLC"). Ciena is headquartered in New York, NY.

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              At December 31, 2008 and 2007, the Company's investment in Ciena was as follows:

 
  2008   2007  
($ in millions)
  Cost   Value   Cost   Value  

Senior Loan

  $ 319.0   $ 104.9   $   $  

Class A Equity Interests

            99.0     68.6  

Class B Equity Interests(1)

    119.5         119.5      

Class C Equity Interests(1)

    109.3         109.3      
                   

Total

  $ 547.8   $ 104.9   $ 327.8   $ 68.6  
                   

(1)
At December 31, 2008 and 2007, the Company held 100% of the Class B equity interests and 94.9% of the Class C equity interests.

              At December 31, 2008 and 2007, other assets includes amounts receivable from or related to Ciena totaling $15.4 million and $5.4 million at cost and $2.1 million and $5.4 million at value, respectively. During the fourth quarter of 2008, the Company sold its Class A Equity Interests in Ciena for nominal consideration to affiliates of AllBridge Financial, LLC, and realized a loss of $98.9 million. Net change in unrealized appreciation or depreciation for the year ended December 31, 2008, included a decrease in the Company's investment in Ciena totaling $296.0 million and the reversal of unrealized depreciation of $99.0 million associated with the realized loss on the sale of the Company's Class A equity interests. Net change in unrealized appreciation or depreciation included a net decrease in the Company's investment in Ciena of $174.5 million and $142.3 million for the years ended December 31, 2007 and 2006, respectively.

              In addition, at December 31, 2008, the Company had standby letters of credit issued under the Company's line of credit of $102.6 million in connection with term securitization transactions completed by Ciena. Due to the economic environment, the term securitizations have experienced increasing defaults and the financial institution that has issued these letters of credit has experienced a ratings downgrade; therefore, some of these letters of credit may be drawn beginning in 2009. Because the Company's asset coverage ratio is currently less than 200%, an event of default has occurred under the Company's line of credit and the Company may need to fund these letter of credit draws with cash in lieu of a borrowing under the Company's line of credit. The Company has considered any funding under the letters of credit in the valuation of Ciena at December 31, 2008.

              Ciena has continued to experience significant deterioration in the value of its assets primarily as a result of an increase in borrower defaults in the current economic environment and decreasing values for financial assets. On September 30, 2008, Ciena voluntarily filed for bankruptcy protection under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Court"). Ciena continues to operate its servicing business and manage its assets as a "debtor-in-possession" under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court. Ciena believes that by filing for bankruptcy protection it will be able to proceed with an orderly sale of its assets over time in more favorable market conditions in the future and thereby maximize the value of its assets and reduce costs in order to repay its debts.

              As a result of Ciena's decision to file for bankruptcy protection, the Company's unconditional guaranty of the obligations outstanding under Ciena's revolving credit facility became due, and the Company, in lieu of paying under its guaranty, purchased the positions of the senior lenders under Ciena's revolving credit facility except for a $5 million position held by Citibank, N.A. The Company paid $325.4 million to fund the purchase, which included $319.0 million of principal, $1.4 million of interest, and $5.0 million of other payments related to the revolving credit facility and the bankruptcy. As of December 31, 2008, the senior secured loan had a cost basis of $319.0 million and a value of

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$104.9 million. The Company continues to guarantee the remaining principal balance of $5 million, plus related interest, fees and expenses payable to Citibank. In connection with the Company's continuing guaranty of the amounts held by Citibank, the Company has agreed with Citibank that the amounts owing to Citibank under the Ciena revolving credit facility will be paid before any of the secured obligations of Ciena now owed to the Company.

              Total interest and related portfolio income earned from the Company's investment in Ciena for the years ended December 31, 2008, 2007, and 2006, was as follows:

($ in millions)
  2008   2007   2006  

Interest income on subordinated debt and Class A equity interests(1)

  $   $   $ 11.9  

Fees and other income

        5.4     7.8  
               

Total interest and related portfolio income

  $   $ 5.4   $ 19.7  
               

(1)
Interest and dividend income from Ciena for the years ended December 31, 2006, included interest and dividend income of $5.7 million, which was paid in kind. The interest and dividends paid in kind were paid to the Company through the issuance of additional debt or equity interests.

              In the fourth quarter of 2006, the Company placed its investment in Ciena's 25% Class A equity interests on non-accrual status. As a result, there was no interest income from the Company's investment in Ciena for the years ended December 31, 2007, and 2008. In consideration for providing a guaranty on Ciena's revolving credit facility and standby letters of credit, the Company earned fees of $5.4 million and $6.1 million for the years ended December 31, 2007 and 2006, respectively, which were included in fees and other income. Ciena has not yet paid the $5.4 million in such fees earned by the Company in 2007, and at December 31, 2008, and 2007, such fees were included as a receivable in other assets with a carrying amount net of depreciation of zero and $5.4 million, respectively. The Company considered these outstanding receivables in its valuation of Ciena at December 31, 2008 and 2007. The remaining fees and other income in 2006 relate to management fees from Ciena. The Company did not accrue the fees earned from Ciena for providing the guaranty and standby letters of credit for the nine months ended September 30, 2008. Subsequent to September 30, 2008, the Company will not earn any fees from Ciena for continuing to provide the guaranty or letters of credit.

              At December 31, 2008, Ciena had two non-recourse securitization warehouse facilities, both of which have matured. In order to pay down debt under the conventional loan warehouse facility, Ciena is in the process of selling loans on behalf of the conventional loan warehouse facility providers. Ciena is also working with the providers of the SBA loan warehouse facility with regard to the repayment of that facility. The Company has issued performance guaranties whereby the Company agreed to indemnify the warehouse providers for any damages, losses, liabilities and related costs and expenses that they may incur as a result of Ciena's failure to perform any of its obligations as loan originator, loan seller or loan servicer under the warehouse securitizations.

              The Office of the Inspector General of the SBA (OIG) and the United States Secret Service are conducting ongoing investigations of allegedly fraudulently obtained SBA-guaranteed loans issued by Ciena. Specifically, on or about January 9, 2007, Ciena became aware of an indictment captioned as the United States v. Harrington, No. 2:06-CR-20662 pending in the United States District Court for the Eastern District of Michigan. The indictment alleged that a former Ciena employee in the Detroit office engaged in the fraudulent origination of loans guaranteed, in substantial part, by the SBA. The Company understands that Ciena is working cooperatively with the U.S. Attorney's Office and the investigating agencies with respect to this matter. On October 1, 2007, the former Ciena employee pled guilty to one count of conspiracy to fraudulently originate SBA-guaranteed loans and one count of making a false statement before a grand jury. The former Ciena employee was sentenced on

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November 13, 2008 to ten years imprisonment and was ordered to pay restitution of $30 million to Ciena, $2.9 million to a commercial bank, and $800,000 to the SBA.

              On March 6, 2007, Ciena entered into an agreement with the SBA. According to the agreement, Ciena would remain a preferred lender in the SBA 7(a) Guaranteed Loan Program and would retain the ability to sell loans into the secondary market. As part of this agreement, Ciena immediately paid approximately $10 million to the SBA to cover amounts paid by the SBA with respect to some of the SBA-guaranteed loans that have been the subject of the charges by the U.S. Attorney's Office for the Eastern District of Michigan against Mr. Harrington. The agreement provided that, during its term, an independent third party selected by the SBA would review loans originated by Ciena before they could be sold into the secondary market and would review defaulted loans repurchased from the secondary market by Ciena before the SBA would reimburse Ciena. The March 6 agreement has expired. Ciena also entered into an escrow agreement with the SBA pursuant to which Ciena deposited $10 million with the escrow agent for any additional payments Ciena may be obligated to pay to the SBA in the future under the agreement.

              Ciena is also subject to other SBA and OIG audits, investigations, and reviews. In addition, the Office of the Inspector General of the U.S. Department of Agriculture is conducting an investigation of Ciena's lending practices under the Business and Industry Loan (B&I) program. The OIG and the U.S. Department of Justice are also conducting a civil investigation of Ciena's lending practices in various jurisdictions. The Company is unable to predict the outcome of these inquiries, and it is possible that third parties could try to seek to impose liability against the Company in connection with certain defaulted loans in Ciena's portfolio. These investigations, audits and reviews are ongoing.

              On or about January 16, 2007, Ciena and its subsidiary Business Loan Center LLC ("BLC") became aware of a lawsuit titled, United States, ex rel James R. Brickman and Greenlight Capital, Inc. v. Business Loan Express LLC f/k/a Business Loan Express, Inc.; Business Loan Center LLC f/k/a Business Loan Center, Inc.; Robert Tannenhauser; Matthew McGee; and George Harrigan, 05-CV-3147 (JEC). The complaint includes allegations arising under the False Claims Act and relating to alleged fraud in connection with SBA guarantees on shrimp vessel loans. On December 18, 2007, the United States District Court for the Northern District of Georgia dismissed all claims in this matter. The plaintiffs appealed the dismissal. Ciena's bankruptcy filing automatically stayed the appeal; however, pursuant to Ciena's request, the Court lifted the automatic stay to permit the appeal to proceed. Oral arguments took place on February 3, 2009 before the U.S. Court of Appeals for the 11th Circuit and the District Court's decision dismissing all claims by the 11th Circuit was affirmed on February 5, 2009. On February 23, 2009, the plaintiff/appellant filed a Petition for Rehearing En Banc, which is now pending.

              These investigations, audits, reviews, and litigation have had and may continue to have a material adverse impact on Ciena and, as a result, could continue to negatively affect the Company's financial results. The Company has considered Ciena's voluntary filing for bankruptcy protection, current regulatory issues, ongoing investigations, and litigation in performing the valuation of Ciena at December 31, 2008.

              Mercury Air Centers, Inc.    In April 2004, the Company completed the purchase of a majority ownership in Mercury Air Centers, Inc. ("Mercury"). At December 31, 2006, the Company's investment in Mercury totaled $84.3 million at cost and $244.2 million at value, which included unrealized appreciation of $159.9 million. In August 2007, the Company completed the sale of its majority equity interest in Mercury. For the year ended December 31, 2007, the Company realized a gain of $262.4 million, subject to post-closing adjustments. For the year ended December 31, 2008, we realized an additional gain of $6.0 million resulting from these post-closing adjustments. In addition, the Company was repaid approximately $51 million of subordinated debt outstanding to Mercury at closing.

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              Mercury owned and operated fixed base operations generally under long-term leases from local airport authorities, which consisted of terminal and hangar complexes that serviced the needs of the general aviation community. Mercury was headquartered in Richmond Heights, OH.

              Total interest and related portfolio income earned from the Company's investment in Mercury for the years ended December 31, 2007, and 2006, was as follows:

($ in millions)
  2007   2006  

Interest income

  $ 5.1   $ 9.3  

Fees and other income

    0.2     0.6  
           

Total interest and related portfolio income

  $ 5.3   $ 9.9  
           

              Net change in unrealized appreciation or depreciation for the year ended December 31, 2007, included an increase in unrealized appreciation totaling $74.9 million for the first half of 2007 and the reversal of $234.8 million associated with the sale of the Company's majority equity interest in the third quarter of 2007. Net change in unrealized appreciation or depreciation for the year ended December 31, 2006, included an increase in unrealized appreciation of $106.1 million related to the Company's investment in Mercury.

              Advantage Sales and Marketing, Inc.    In June 2004, the Company completed the purchase of a majority voting ownership in Advantage Sales and Marketing, Inc. ("Advantage"). At December 31, 2005, the Company's investment in Advantage totaled $257.7 million at cost and $660.4 million at value, which included unrealized appreciation of $402.7 million. Advantage is a sales and marketing agency providing outsourced sales, merchandising, and marketing services to the consumer packaged goods industry. Advantage has offices across the United States and is headquartered in Irvine, CA.

              On March 29, 2006, the Company sold its majority equity interest in Advantage. The Company was repaid its $184 million in subordinated debt outstanding at closing. For the year ended December 31, 2006, the Company realized a gain on the sale of its equity investment of $434.4 million, subject to post-closing adjustments and excluding any earn-out amounts. The Company realized additional gains in 2008 and 2007 resulting from post-closing adjustments and an earn-out payment totaling $1.9 million and $3.4 million, respectively, subject to additional post-closing adjustments.

              As consideration for the common stock sold in the transaction, the Company received a $150 million subordinated note, with the balance of the consideration paid in cash. In addition, a portion of the Company's cash proceeds from the sale of the common stock were placed in escrow, subject to certain holdback provisions. At December 31, 2008, the amount of the escrow included in other assets in the accompanying consolidated balance sheet was approximately $23.3 million. For tax purposes, the receipt of the $150 million subordinated note as part of the Company's consideration for the common stock sold and the hold back of certain proceeds in escrow generally will allow the Company, through installment treatment, to defer the recognition of taxable income for a portion of the Company's realized gain until the note or other amounts are collected.

              Total interest and related portfolio income earned from the Company's investment in Advantage while the Company held a majority equity interest was $14.1 million (which included a prepayment premium of $5.0 million) for the year ended December 31, 2006. In addition, the Company earned structuring fees of $2.3 million on its new $150 million subordinated debt investment in Advantage upon the closing of the sale in 2006. Net change in unrealized appreciation or depreciation for the year ended December 31, 2006, included the reversal of $389.7 million of previously recorded unrealized appreciation associated with the realization of a gain on the sale of the Company's majority equity interest in Advantage.

F-166


              In connection with the sale transaction, the Company retained an equity investment in the business valued at $15 million at closing. During the fourth quarter of 2006, Advantage made a distribution on this minority equity investment, which resulted in a realized gain of $4.8 million.

              The Company's investment in Advantage at December 31, 2008, which was composed of subordinated debt and a minority equity interest, totaled $158.1 million at cost and $140.0 million at value which included unrealized depreciation of $18.1 million. This investment was included in companies 5% to 25% owned in the consolidated financial statements as the Company continues to hold a seat on Advantage's board of directors.

              Collateralized Loan Obligations ("CLOs") and Collateralized Debt Obligations ("CDOs").    At December 31, 2008 and 2007, the Company owned bonds and preferred shares/income notes in CLOs and bonds in a CDO as follows:

 
  2008   2007  
($ in millions)
  Cost   Value   Yield(1)   Cost   Value   Yield(1)  

Bonds(2):

                                     

Callidus Debt Partners CDO Fund I, Ltd. 

  $ 28.4   $ 10.1     39.4 % $ 28.4   $ 28.5     14.0 %

Callidus Debt Partners CLO Fund IV, Ltd. 

    2.0     1.4     26.9 %              

Callidus Debt Partners CLO Fund VI, Ltd. 

    7.1     3.9     26.1 %   4.3     4.3     13.4 %

Callidus MAPS CLO Fund I LLC

    17.0     9.8     12.2 %   17.0     16.1     11.0 %

Callidus MAPS CLO Fund II LLC

    3.6     3.0     30.2 %              

Dryden XVIII Leveraged Loan 2007 Limited

    7.7     4.5     20.5 %   7.4     7.4     12.7 %

Knightsbridge CLO 2007-1 Ltd.(3)

    18.7     14.9     17.4 %   22.0     22.0     14.1 %

Knightsbridge CLO 2008-1 Ltd.(3)

    31.4     31.4     10.2 %              

Pangaea CLO 2007-1 Ltd. 

    11.8     7.1     25.0 %   11.6     11.6     13.9 %
                               

Total bonds

   
127.7
   
86.1
   
18.5

%
 
90.7
   
89.9
   
13.3

%

Preferred Shares/Income Notes:

                                     

Callidus Debt Partners CLO Fund III, Ltd. 

    20.1     5.4     %   21.8     20.0     14.1 %

Callidus Debt Partners CLO Fund IV, Ltd. 

    14.6     10.6     18.1 %   12.3     11.3     16.1 %

Callidus Debt Partners CLO Fund V, Ltd. 

    13.4     10.3     21.3 %   14.0     14.7     19.3 %

Callidus Debt Partners CLO Fund VI, Ltd. 

    28.3     23.1     21.8 %   27.0     27.0     19.3 %

Callidus Debt Partners CLO Fund VII, Ltd. 

    24.0     15.4     17.9 %   22.1     22.1     16.6 %

Callidus MAPS CLO Fund I LLC

    45.1     27.8     6.5 %   49.3     36.1     7.6 %

Callidus MAPS CLO Fund II, Ltd. 

    18.4     12.6     19.3 %   18.7     18.7     14.7 %

Dryden XVIII Leveraged Loan 2007 Limited

    22.1     17.5     20.2 %   21.9     21.9     14.2 %

Knightsbridge CLO 2007-1 Ltd.(3)

    40.9     35.2     17.4 %   31.2     31.2     15.2 %

Knightsbridge CLO 2008-1 Ltd.(3)

    21.3     21.3     16.6 %              

Total preferred shares/income notes

   
248.2
   
179.2
   
16.4

%
 
218.3
   
203.0
   
14.6

%
                               

Total

  $ 375.9   $ 265.3         $ 309.0   $ 292.9        
                               

(1)
The weighted average yield is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective interest yield on the preferred shares/income notes, divided by (b) CLO and CDO assets at value. The yield on these debt and equity securities is included in interest income in the accompanying consolidated statement of operations.


The market yield used in the valuation of the CLO and CDO assets may be different than the interest yields shown above.

(2)
These securities are included in private finance subordinated debt.

F-167


(3)
These funds are managed by the Company through a wholly-owned subsidiary.

              The initial yields on the cost basis of the CLO preferred shares and income notes are based on the estimated future cash flows expected to be paid to these CLO classes from the underlying collateral assets. As each CLO preferred share or income note ages, the estimated future cash flows are updated based on the estimated performance of the underlying collateral assets, and the respective yield on the cost basis is adjusted as necessary. As future cash flows are subject to uncertainties and contingencies that are difficult to predict and are subject to future events that may alter current assumptions, no assurance can be given that the anticipated yields to maturity will be achieved.

              The bonds, preferred shares and income notes of the CLOs and CDO in which the Company has invested are junior in priority for payment of interest and principal to the more senior notes issued by the CLOs and CDO. Cash flow from the underlying collateral assets in the CLOs and CDO generally is allocated first to the senior bonds in order of priority, then any remaining cash flow generally is distributed to the preferred shareholders and income note holders. To the extent there are ratings downgrades, defaults and unrecoverable losses on the underlying collateral assets that result in reduced cash flows, the preferred shares/income notes will bear this loss first and then the subordinated bonds would bear any loss after the preferred shares/income notes. At both December 31, 2008 and 2007, the face value of the CLO and CDO assets held by the Company was subordinate to as much as 94% of the face value of the securities outstanding in these CLOs and CDO.

              At December 31, 2008 and 2007, based on information provided by the collateral managers, the underlying collateral assets of these CLO and CDO issuances, consisting primarily of senior corporate loans, were issued by 658 issuers and 671 issuers, respectively, and had principal balances as follows:

($ in millions)
  2008   2007  

Bonds

  $ 268.3   $ 288.5  

Syndicated loans

    4,477.3     4,122.7  

Cash(1)

    89.6     104.4  
           

Total underlying collateral assets(2)

  $ 4,835.2   $ 4,515.6  
           

(1)
Includes undrawn liability amounts.

(2)
At December 31, 2008 and 2007, the total face value of defaulted obligations was $95.0 million and $18.4 million, respectively, or approximately 2.0% and 0.4% respectively, of the total underlying collateral assets.

              Loans and Debt Securities on Non-Accrual Status.    At December 31, 2008 and 2007, private finance loans and debt securities at value not accruing interest were as follows:

($ in millions)
  2008   2007  

Loans and debt securities in workout status

             

Companies more than 25% owned

  $ 136.8   $ 114.1  

Companies 5% to 25% owned

        11.7  

Companies less than 5% owned

    74.6     23.8  

Loans and debt securities not in workout status

             

Companies more than 25% owned

    39.3     21.4  

Companies 5% to 25% owned

        13.4  

Companies less than 5% owned

    77.2     13.3  
           

Total

  $ 327.9   $ 197.7  
           

F-168


              Industry and Geographic Compositions.    The industry and geographic compositions of the private finance portfolio at value at December 31, 2008 and 2007, were as follows:

 
  2008   2007  

Industry

             

Business services

    36 %   37 %

Consumer products

    24     25  

CLO/CDO(1)

    8     6  

Financial services

    6     6  

Industrial products

    5     10  

Consumer services

    5     4  

Retail

    5     4  

Private debt funds

    5     1  

Healthcare services

    2     3  

Other

    4     4  
           

Total

    100 %   100 %
           

Geographic Region(2)

             

Mid-Atlantic

    41 %   36 %

Midwest

    28     32  

Southeast

    17     17  

West

    13     14  

Northeast

    1     1  
           

Total

    100 %   100 %
           

(1)
These funds primarily invest in senior corporate loans. Certain of these funds are managed by Callidus Capital, a portfolio company of Allied Capital.

(2)
The geographic region for the private finance portfolio depicts the location of the headquarters for the Company's portfolio companies. The portfolio companies may have a number of other locations in other geographic regions.

              At December 31, 2008 and 2007, the commercial real estate finance portfolio consisted of the following:

 
  2008   2007  
($ in millions)
  Cost   Value   Yield(1)   Cost   Value   Yield(1)  

Commercial mortgage loans

  $ 52.5   $ 53.5     7.4 % $ 65.9   $ 65.4     6.8 %

Real estate owned

    18.2     20.8           15.3     21.3        

Equity interests

    14.8     19.6           15.7     34.5        
                               

Total

  $ 85.5   $ 93.9         $ 96.9   $ 121.2        
                               

(1)
The weighted average yield on the commercial mortgage loans is computed as the (a) annual stated interest on accruing loans plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans less the annual amortization of origination costs, divided by (b) total interest-bearing investments at value. The weighted average yield is computed as of the balance sheet date.

F-169


              Commercial Mortgage Loans and Equity Interests.    The commercial mortgage loan portfolio contains loans that were originated by the Company or were purchased from third-party sellers. At December 31, 2008, approximately 69% and 31% of the Company's commercial mortgage loan portfolio was composed of fixed and adjustable interest rate loans, respectively. At December 31, 2007, approximately 85% and 15% of the Company's commercial mortgage loan portfolio was composed of fixed and adjustable interest rate loans, respectively. At December 31, 2008 and 2007, loans with a value of $7.7 million and $14.3 million, respectively, were not accruing interest. Loans greater than 120 days delinquent generally do not accrue interest.

              Equity interests consist primarily of equity securities issued by privately owned companies that invest in single real estate properties. These equity interests may be subject to certain restrictions on their resale and are generally illiquid. Equity interests generally do not produce a current return, but are generally held in anticipation of investment appreciation and ultimate realized gain on sale.

              The property types and the geographic composition securing the commercial mortgage loans and equity interests at value at December 31, 2008 and 2007, were as follows:

 
  2008   2007  

Property Type

             

Hospitality

    52 %   44 %

Recreation

    22     15  

Office

    15     21  

Retail

    9     18  

Other

    2     2  
           

Total

    100 %   100 %
           

Geographic Region

             

Southeast

    43 %   40 %

West

    26     20  

Midwest

    22     31  

Northeast

    9     7  

Mid-Atlantic

        2  
           

Total

    100 %   100 %
           

              The Company, as a BDC, has invested in illiquid securities including debt and equity securities of portfolio companies, CLO bonds and preferred shares/income notes, CDO bonds and investment funds. The Company's investments may be subject to certain restrictions on resale and generally have no established trading market. The Company values substantially all of its investments at fair value as determined in good faith by the Board of Directors in accordance with the Company's valuation policy and the provisions of the Investment Company Act of 1940 and SFAS 157. The Company determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. The Company's valuation policy considers the fact that no ready market exists for substantially all of the securities in which it invests and that fair value for its investments must typically be determined using unobservable inputs.

              SFAS 157 establishes a fair value hierarchy that encourages the use of observable inputs, but allows for unobservable inputs when observable inputs do not exist. Inputs are classified into one of three categories:

F-170


              When there are multiple inputs for determining the fair value of an investment, the Company classifies the investment in total based on the lowest level input that is significant to the fair value measurement.

              Assets measured at fair value on a recurring basis by level within the fair value hierarchy at December 31, 2008, were as follows:

 
  Fair Value
Measurement
as of December 31,
2008
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

($ in millions)

                         

Assets at Fair Value:

                         

Portfolio

                         

Private finance

  $ 3,399.1   $   $   $ 3,399.1  

Commercial real estate finance

    93.9             93.9  
                   

Total portfolio

  $ 3,493.0   $   $   $ 3,493.0  
                   

              The table below sets forth a summary of changes in the Company's assets measured at fair value using level 3 inputs.

 
  Private
Finance
  Commercial
Real Estate
Finance
  Total  

($ in millions)

                   

Balance at December 31, 2007

  $ 4,652.7   $ 121.2   $ 4,773.9  

Total gains or losses:

                   

Net realized gains (losses)(1)

    (80.9 )   (4.1 )   (85.0 )

Net change in unrealized appreciation or depreciation(2)

    (1,089.2 )   (15.9 )   (1,105.1 )

Purchases, issuances, repayments and exits, net(3)

    (83.5 )   (7.3 )   (90.8 )

Transfers in and/or out of level 3

             
               

Balance at December 31, 2008

  $ 3,399.1   $ 93.9   $ 3,493.0  
               

Net unrealized appreciation (depreciation) during the period relating to assets still held at the reporting date(2)

  $ (1,202.1 ) $ (20.8 ) $ (1,222.9 )
               

(1)
Includes net realized gains (losses) (recorded as realized gains or losses in the accompanying consolidated statement of operations) and amortization of discounts and closing points (recorded as interest income in the accompanying consolidated statement of operations).

(2)
Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statement of operations. Net change in unrealized appreciation or depreciation includes net unrealized appreciation (depreciation) resulting from changes in portfolio investment values during the reporting period and the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

(3)
Includes interest and dividend income reinvested through the receipt of a debt or equity security (payment-in-kind income) (recorded as interest and dividend income in the accompanying consolidated statement of operations).

F-171


              In addition to managing its own assets, the Company manages certain funds that also invest in the debt and equity securities of primarily private middle market companies in a variety of industries. At December 31, 2008, the Company had five separate funds under its management (together, the "Managed Funds") for which the Company may earn management or other fees for the Company's services. The Company may invest in the equity of these funds, along with other third parties, from which the Company may earn a current return and/or a future incentive allocation.

              At December 31, 2008, the funds that the Company manages had total assets of approximately $2.1 billion. The Company's responsibilities to the Managed Funds may include investment origination, underwriting, and portfolio monitoring services. Each of the Managed Funds may separately invest in the debt or equity of companies in the Company's portfolio, and these investments may be senior, pari passu or junior to the debt and equity investments held by the Company. The Company may or may not participate in investments made by the Managed Funds. In December 2008, the Company agreed to purchase the management contracts of three additional funds for approximately $10 million plus an earnout not to exceed $1.5 million, and certain transaction costs. The aggregate assets held by these funds total approximately $1.2 billion. The Company expects to begin managing these funds in early 2009.

              The Company accounts for the sale of securities to funds with which it has continuing involvement as sales pursuant to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125, when the securities have been legally isolated from the Company, the Company has no ability to restrict or constrain the ability of the funds to pledge or exchange the transferred securities, and the Company does not have either the entitlement and the obligation to repurchase the securities or the ability to unilaterally cause the fund to put the securities back to the Company.

              Unitranche Fund LLC.    In December 2007, the Company formed the Unitranche Fund LLC ("Unitranche Fund"), which the Company co-manages with an affiliate of General Electric Capital Corporation ("GE"). At December 31, 2008, the Unitranche Fund had total assets of $789.8 million, and the Company's investment in the Unitranche Fund totaled $125.4 million at cost and at value.

              The Unitranche Fund is a private fund that generally focuses on making first lien unitranche loans to middle market companies with Earnings before Interest, Taxes, Depreciation, and Amortization of at least $15 million. The Unitranche Fund may invest up to $270 million for a single borrower. For financing needs greater than $270 million, the Company and GE may jointly underwrite additional financing for a total unitranche financing of up to $500 million. Allied Capital, GE and the Unitranche Fund may co-invest in a single borrower, with the Unitranche Fund holding at least a majority of the issuance. The Company may hold the portion of a unitranche loan underwritten by the Company. GE has committed $3.075 billion to the Unitranche Fund consisting of $3.0 billion of senior notes and $0.075 billion of subordinated certificates, and the Company has committed $525.0 million of subordinated certificates. The Unitranche Fund is capitalized as transactions are completed. Investments made by the Unitranche Fund must be approved by the investment committee of the Unitranche Fund, which includes a representative from the Company and GE. Therefore, the Company's commitment to the Unitranche Fund cannot be drawn without the Company's approval. The level of investments made by the Unitranche Fund will be dependent on market conditions, the Unitranche Fund's ability to identify attractive investment opportunities, and the Company's ability to fund its commitment to the Unitranche Fund. The Company earns a management and sourcing fee totaling 0.375% per annum of managed assets. In addition to the management and sourcing fee, the Company earns structuring fees on investments made by the Unitranche Fund.

              Allied Capital Senior Debt Fund, L.P.    The Company is a special limited partner in the Allied Capital Senior Debt Fund, L.P. ("ACSDF"), a private fund that generally invests in senior, unitranche

F-172



and second lien debt. The Company has committed and funded $31.8 million to ACSDF, which is a portfolio company. At December 31, 2008, the Company's investment in ACSDF totaled $31.8 million at cost and at value, and ACSDF had total assets of $412.9 million. As a special limited partner, the Company may earn an incentive allocation to the extent of 20% of the annual net income of ACSDF, subject to certain performance benchmarks. There can be no assurance that this incentive allocation will be earned, particularly given the current economic environment. The value of the Company's investment in ACSDF is based on the net asset value of ACSDF, which reflects the capital invested plus the Company's allocation of the net earnings of ACSDF, including the incentive allocation.

              AC Corp is the investment manager to ACSDF. Callidus Capital Corporation, a portfolio investment controlled by the Company, acts as special manager to ACSDF. A subsidiary of the Company is the general partner of ACSDF, and AC Corp serves as collateral manager to a warehouse financing vehicle associated with ACSDF. AC Corp will earn a management fee of up to 2% per annum of the net asset value of ACSDF and will pay Callidus 25% of that management fee to compensate Callidus for its role as special manager.

              The Company may offer to sell loans to ACSDF or the warehouse financing vehicle. ACSDF or the warehouse financing vehicle may purchase loans from the Company. In connection with ACSDF's formation in June 2007 and during the second half of 2007, the Company sold $224.2 million of seasoned assets with a weighted average yield of 10.0% to a warehouse financing vehicle associated with ACSDF. During the year ended December 31, 2008, the Company sold $72.3 million of seasoned assets with a weighted average yield of 9.2% to the warehouse financing vehicle. ACSDF has also purchased loans from other third parties. Due to the lack of liquidity in the securitization markets, ACSDF is not currently purchasing loans and at December 31, 2008, the ACSDF warehouse financing vehicle had completed its reinvestment period and any investment repayments are used to repay outstanding balances under the warehouse facility.

              Knightsbridge CLO 2007-1 Ltd.    On March 31, 2008, the Company, through a wholly-owned subsidiary, assumed the management of Knightsbridge CLO 2007-1 Ltd. ("Knightsbridge 2007"), which invests primarily in middle market senior loans.

              At December 31, 2008, Knightsbridge 2007 had total assets of $500.6 million and the Company's investment in this CLO totaled $59.6 million at cost and $50.1 million at value. The Company earns a management fee of up to 0.6% per annum of the assets of Knightsbridge 2007, up to 7.5% of which is paid to an unaffiliated third party in its capacity as special equity holder. In addition, Callidus assists the Company in the management of Knightsbridge 2007 and the Company pays Callidus a fee for this assistance.

              The Company may offer to sell loans to Knightsbridge 2007 and Knightsbridge 2007 may purchase loans from the Company or from other third parties. During the year ended December 31, 2008, the Company sold loans totaling $95.4 million with a weighted average yield of 8.5% to Knightsbridge 2007.

              Knightsbridge CLO 2008-1 Ltd.    In June 2008, the Company formed Knightsbridge 2008-1 Ltd. ("Knightsbridge 2008"). Upon its formation, Knightsbridge 2008 completed its initial purchase of assets from a third party. The Company manages Knightsbridge 2008 through a wholly-owned subsidiary. Knightsbridge 2008 invests primarily in middle market senior loans.

              At December 31, 2008, Knightsbridge 2008 had total assets of $304.8 million and the Company's investment in this CLO totaled $52.7 million at cost and at value. The Company earns a management fee of up to 0.6% per annum of the assets of Knightsbridge 2008, up to 10% of which is paid to an unaffiliated third party in its capacity as special equity holder. In addition, Callidus assists the Company in the management of Knightsbridge 2008 and the Company pays Callidus a fee for this assistance.

F-173


              The Company may offer to sell loans to Knightsbridge 2008 and Knightsbridge 2008 may purchase loans from the Company or from other third parties. During the year ended December 31, 2008, the Company sold loans totaling $48.6 million with a weighted average yield of 9.3% to Knightsbridge 2008.

              AGILE Fund I, LLC.    In January 2008, the Company entered into an investment agreement with the Goldman Sachs Private Equity Group, part of Goldman Sachs Asset Management ("Goldman Sachs"). As part of the investment agreement, the Company agreed to sell a pro-rata strip of private equity and debt investments to AGILE Fund I, LLC ("AGILE"), a private fund in which a fund managed by Goldman Sachs owns substantially all of the interests, for a total transaction value of $167 million. The sales of the assets closed in the first quarter of 2008.

              The sale to AGILE included 13.7% of the Company's equity investments in 23 of its buyout portfolio companies and 36 of its minority equity portfolio companies for a total purchase price of $104 million which resulted in a net realized gain of $8.3 million (subsequent to post-closing adjustments) and dividend income of $6.4 million. In addition, the Company sold approximately $63 million in debt investments, which represented 7.3% of its unitranche, second lien and subordinated debt investments in the buyout investments included in the equity sale. AGILE generally has the right to co-invest in its proportional share of any future follow-on investment opportunities presented by the companies in its portfolio.

              The Company is the managing member of AGILE, and will be entitled to an incentive allocation subject to certain performance benchmarks. There can be no assurance that this incentive allocation will be earned, particularly given the current economic environment. The Company owns the remaining interests in AGILE not held by Goldman Sachs. At December 31, 2008, AGILE had total assets of $99.3 million and the Company's investment in AGILE totaled $0.7 million at cost and $0.5 million at value.

              As part of this transaction, the Company also sold ten venture capital and private equity limited partnership investments for approximately $28 million to a fund managed by Goldman Sachs, which will assume the $5.3 million of unfunded commitments related to these limited partnership investments. The sales of these limited partnership investments closed in the first half of 2008 and resulted in a net loss of $7.0 million (subsequent to post-closing adjustments) for the year ended December 31, 2008.

Note 4.   Debt

              At December 31, 2008 and 2007, the Company had the following debt:

 
  2008   2007  
($ in millions)
  Facility Amount   Amount Drawn   Annual Interest Cost(1)   Facility Amount   Amount Drawn   Annual Interest Cost(1)  

Notes payable:

                                     

Privately issued unsecured notes payable

  $ 1,015.0   $ 1,015.0     7.8 % $ 1,042.2   $ 1,042.2     6.1 %

Publicly issued unsecured notes payable

    880.0     880.0     6.7 %   880.0     880.0     6.7 %
                               

Total notes payable and debentures

    1,895.0     1,895.0     7.3 %   1,922.2     1,922.2     6.4 %

Revolving line of credit(4)

    632.5     50.0     4.3 %(2)   922.5     367.3     5.9 %(2)
                               

Total debt

  $ 2,527.5   $ 1,945.0     7.7 %(3) $ 2,844.7   $ 2,289.5     6.5 %(3)
                               

(1)
The weighted average annual interest cost is computed as the (a) annual stated interest on the debt plus the annual amortization of commitment fees, other facility fees and amortization of debt

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(2)
The annual interest cost reflects the interest rate payable for borrowings under the revolving line of credit. In addition to the current interest payable, there were annual costs of commitment fees, other facility fees and amortization of debt financing costs of $8.5 million and $3.7 million at December 31, 2008 and 2007, respectively.

(3)
The annual interest cost for total debt includes the annual cost of commitment fees, other facility fees and amortization of debt financing costs on the revolving line of credit regardless of the amount outstanding on the facility as of the balance sheet date. The annual interest cost reflects the facilities in place on the balance sheet date.

(4)
At December 31, 2008, $460.2 million remained unused on the revolving line of credit, net of amounts committed for standby letters of credit of $122.3 million issued under the credit facility.

              Revolving Line of Credit.    The Company has a three-year unsecured revolving line of credit with total commitments of $632.5 million that expires on April 11, 2011 (the "Revolving Line of Credit"). At December 31, 2007, the Company had an unsecured Revolving Line of Credit with a committed amount of $922.5 million that was scheduled to expire on September 30, 2008. At December 31, 2008, there was $50.0 million outstanding under the Company's Revolving Line of Credit and the amount available under the Revolving Line of Credit was $460.2 million, net of amounts committed for standby letters of credit of $122.3 million issued under the credit facility.

              Borrowings under the Revolving Line of Credit generally bear interest at a rate per annum equal to (i) LIBOR (for the period selected by the Company) plus 3.00% or (ii) the higher of (a) the Federal Funds rate plus 1.50% or (b) the Bank of America N.A. prime rate plus 1.00%. The Revolving Line of Credit requires the payment of an annual commitment fee equal to 0.50% of the committed amount (whether used or unused). The Revolving Line of Credit generally requires payments of interest at the end of each LIBOR interest period, but no less frequently than quarterly, on LIBOR-based loans, and monthly payments of interest on other loans. All principal is due upon maturity.

              The Revolving Line of Credit provides for a swingline sub-facility. The swingline sub-facility bears interest at the Bank of America N.A. cost of funds plus 2.00%. The Revolving Line of Credit also provides for a sub-facility for the issuance of letters of credit for up to an aggregate amount of $175 million. The letter of credit fee is 3.00% per annum on letters of credit issued, which is payable quarterly. Events of default have increased the interest rate and fees on letters of credit by up to 2.00% during the continuance of such events of default. See Note 1.

              Privately Issued Unsecured Notes Payable.    The Company has privately issued notes (the "Private Notes") to institutional investors, primarily insurance companies. The Private Notes have five- or seven-year maturities and stated fixed rates of interest ranging from 6.53% to 9.14% at December 31, 2008. Events of default have occurred which has increased these interest rates by 2.00% during the continuance of such events of default. See Note 1. The Private Notes generally require payment of interest only semi-annually, and all principal is due upon maturity. At December 31, 2008, the Private Notes had maturities from November 2009 to June 2015. The Private Notes may be prepaid in whole or in part, together with an interest premium, if any, as stipulated in the private note agreements.

              In June 2008, the Company issued $140.5 million of five-year notes and $52.5 million of seven-year notes. The debt matures in June 2013 and June 2015, respectively.

              In May 2008, the Company repaid $153.0 million of notes that matured and had a fixed interest rate of 5.45%. In December 2008, the Company prepaid notes denominated in Euros and Sterling for a total U.S. dollar equivalent of $16 million with an interest rate of 5.9%. In December 2008, the Company also prepaid Private Notes with an outstanding balance of $50 million at a discount.

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The net gain on the discounted payoff was $1.1 million, which is included in fees and other income in the Company's Consolidated Statement of Operations. These notes had a fixed interest rate of 6.75%.

              The Revolving Line of Credit and the Private Notes have similar financial and operating covenants. These covenants require the Company to maintain certain financial ratios, including asset coverage, debt to equity and interest coverage, and a minimum net worth. These debt agreements provide for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, cross-defaults, bankruptcy events, failure to pay judgments, attachment of our assets, change of control and the issuance of an order of dissolution. Certain of these events of default are subject to notice and cure periods or materiality thresholds. These debt agreements limit the Company's ability to declare dividends or repurchase its common stock during the existence of certain defaults and events of default.

              Amendments to Revolving Line of Credit and Privately Issued Unsecured Notes Payable.    On December 30, 2008, the Company entered into amendments relating to the Company's Private Notes and Revolving Line of Credit. The amendments reduced the Company's capital maintenance covenant to the greater of $1.5 billion and 85% of consolidated adjusted debt, and reduced the Company's interest charges coverage ratio covenant, determined as of the last day of each fiscal quarter for the period of four consecutive fiscal quarters ending on such day, to 1.4 to 1 for the fiscal quarter ending December 31, 2008 and each fiscal quarter thereafter to and including the fiscal quarter ending December 31, 2009, to 1.6 to 1 for the fiscal quarter ending March 31, 2010 and each fiscal quarter thereafter to and including the fiscal quarter ending December 31, 2010, and to 1.7 to 1 for the fiscal quarter ending March 31, 2011 and each fiscal quarter thereafter. The amendments did not modify the Company's obligation to maintain a minimum 200% asset coverage ratio.

              The amendments added new covenants that required the Company to grant to the Noteholders and the Lenders a first priority lien on substantially all of the Company's assets no later than January 30, 2009, and to maintain a ratio of consolidated total adjusted assets to secured debt of not less than 2.25 to 1. Also, prior to December 31, 2010, the Company is (i) required to limit the payment of dividends to a maximum of $0.20 per share per fiscal quarter (or such greater amount required for the Company to maintain its regulated investment company status), and (ii) restricted from purchasing, redeeming or retiring any shares of the Company's common stock or any warrants, rights or options to purchase or acquire any shares of the Company's common stock for an aggregate consideration in excess of $60 million. In addition, the amendments restricted the Company from prepaying, redeeming, purchasing or otherwise acquiring any of its currently outstanding public notes prior to their stated maturity. The amendments also made certain other modifications. The amendments increased the rate of interest on the instruments by 100 basis points. In addition, these amendments required a 50 basis point amendment fee.

              Events of default have occurred under the Revolving Line of Credit and Private Notes. See Note 1.

              Publicly Issued Unsecured Notes Payable.    At December 31, 2008, the Company had outstanding publicly issued unsecured notes as follows:

($ in millions)
  Amount   Maturity Date  

6.625% Notes due 2011

  $ 400.0     July 15, 2011  

6.000% Notes due 2012

    250.0     April 1, 2012  

6.875% Notes due 2047

    230.0     April 15, 2047  
             

Total

  $ 880.0        
             

              The 6.625% Notes due 2011 and the 6.000% Notes due 2012 require payment of interest only semi-annually, and all principal is due upon maturity. The Company has the option to redeem these notes in whole or in part, together with a redemption premium, as stipulated in the notes.

F-176


              In 2007, the Company completed the issuance of $230.0 million of 6.875% Notes due 2047 for net proceeds of $222.1 million. Net proceeds are net of underwriting discounts and estimated offering expenses. These notes require payment of interest only quarterly, and all principal is due upon maturity. These notes are redeemable in whole or in part at any time or from time to time on or after April 15, 2012, at par and upon the occurrence of certain tax events as stipulated in the notes.

              The Company has certain financial and operating covenants that are required by the publicly issued unsecured notes payable. The Company is not permitted to issue indebtedness unless immediately after such issuance the Company has asset coverage of all outstanding indebtedness of at least 200% as required by the 1940 Act, as amended. At December 31, 2008, the Company's asset coverage ratio was 188%, which is less than the 200% requirement. As a result under the publicly issued unsecured notes payable, the Company will not be able to issue indebtedness until such time as the Company's asset coverage returns to at least 200%. The Company has not experienced any default or cross default with respect to the publicly issued unsecured notes payable.

              Scheduled Maturities.    Scheduled future maturities of notes payable at December 31, 2008, were as follows:

 
  Amount Maturing  
($ in millions)
Year
  Privately
Issued
Unsecured Notes
Payable(1)
  Publicly
Issued
Unsecured Notes
Payable
  Total  

2009

  $ 1,015.0   $   $ 1,015.0  

2010

             

2011

        400.0     400.0  

2012

        250.0     250.0  

2013

             

Thereafter

        230.0     230.0  
               

Total

  $ 1,015.0   $ 880.0   $ 1,895.0  
               

(1)
The private notes have stated contractual maturities as follows: 2009—$252.5 million, 2010—$408.0 million, 2011—$72.5 million, 2012—$89.0 million, 2013—$140.5 million, and thereafter—$52.5 million.

              As discussed above, events of default have occurred under the revolving line of credit and private notes. Neither the lenders nor noteholders have accelerated repayment; however, if the administrative agent for the lenders under the revolving line of credit or the required percentage of lenders under the revolving line of credit or noteholders under the private notes, respectively, were to accelerate repayment, these obligations would become immediately due and payable. Therefore, in the table above, the private notes are shown as payable in 2009.

              The Company records debt at cost. The fair value of the Company's outstanding debt was approximately $1.4 billion and $2.2 billion at December 31, 2008 and 2007, respectively. The fair value of the Company's publicly issued 6.875% Notes due 2047 was determined using the market price of the retail notes at December 31, 2008. The fair value of the Company's other debt was determined based on market interest rates for similar instruments as of the balance sheet date.

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Note 5.   Guarantees and Commitments

              In the ordinary course of business, the Company has issued guarantees and has extended standby letters of credit through financial intermediaries on behalf of certain portfolio companies. All standby letters of credit have been issued through Bank of America, N.A. As of December 31, 2008 and 2007, the Company had issued guarantees of debt and rental obligations aggregating $19.2 million and $270.6 million, respectively, and had extended standby letters of credit aggregating $122.3 million and $58.5 million, respectively. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. The maximum amount of potential future payments was $141.5 million and $329.1 million at December 31, 2008 and 2007, respectively.

              As of December 31, 2008, the guarantees and standby letters of credit expired as follows:

(in millions)
  Total   2009   2010   2011   2012   2013   After
2013
 

Guarantees

  $ 19.2   $ 7.5   $ 6.4   $ 4.4   $ 0.1   $   $ 0.8  

Standby letters of credit

    122.3     122.3                      
                               

Total

  $ 141.5   $ 129.8   $ 6.4   $ 4.4   $ 0.1   $   $ 0.8  
                               

              Standby letters of credit have been issued under the Revolving Line of Credit. Because the Company's asset coverage ratio is currently less than 200%, an event of default has occurred under the Company's line of credit and the Company is precluded from borrowing under the Revolving Line of Credit to fund these standby letters of credit and the Company may need to fund these letter of credit draws with cash in lieu of a borrowing. During the existence of an event of default, the administrative agent is permitted to require the Company to provide cash collateral equal to the face amount of all outstanding standby letters of credit. As a result, in the table above the Company has assumed that these standby letters of credit may not be able to be extended and may mature in 2009.

              In the ordinary course of business, the Company enters into agreements with service providers and other parties that may contain provisions for the Company to indemnify and guaranty certain minimum fees to such parties under certain circumstances.

              At December 31, 2008, the Company had outstanding commitments to fund investments totaling $682.1 million, including $648.7 million related to private finance investments and $33.4 million related to commercial real estate finance investments. Total outstanding commitments related to private finance investments included $399.6 million to the Unitranche Fund LLC. Investments made by the Unitranche Fund must be approved by the investment committee of the Unitranche Fund, which includes a representative from the Company and GE. Therefore, the Company's commitment to the Unitranche Fund cannot be drawn without the Company's approval. See Note 3.

Note 6.   Shareholders' Equity

              Sales of common stock for the years ended December 31, 2008, 2007, and 2006, were as follows:

(in millions)
  2008   2007   2006  

Number of common shares

    20.5     6.6     10.9  
               

Gross proceeds

  $ 417.1   $ 177.7   $ 310.2  

Less costs, including underwriting fees

    (14.6 )   (6.4 )   (14.4 )
               

Net proceeds

  $ 402.5   $ 171.3   $ 295.8  
               

F-178


              There were no stock options exercised in the year ended December 31, 2008. The Company issued 0.6 million and 0.5 million shares of common stock upon the exercise of stock options during the years ended December 31, 2007, and 2006, respectively. In addition, in July 2007, the Company issued 1.7 million unregistered shares of common stock upon the cancellation of stock options pursuant to a tender offer. See Note 9.

              The Company has a dividend reinvestment plan, whereby the Company may buy shares of its common stock in the open market or issue new shares in order to satisfy dividend reinvestment requests. If the Company issues new shares, the issue price is equal to the average of the closing sale prices reported for the Company's common stock for the five consecutive trading days immediately prior to the dividend payment date. The Company cannot issue new shares at a price below net asset value. Dividend reinvestment plan activity for the years ended December 31, 2008, 2007, and 2006, was as follows:

(in millions, except per share amounts)
  2008   2007   2006  

Shares issued

    0.2     0.6     0.5  

Average price per share

  $ 19.49   $ 27.40   $ 30.58  

Shares purchased by plan agent for shareholders

   
1.8
   
   
 

Average price per share

  $ 6.09          

Note 7.   Earnings Per Common Share

              Earnings per common share for the years ended December 31, 2008, 2007, and 2006, were as follows:

(in millions, except per share amounts)
  2008   2007   2006  

Net increase (decrease) in net assets resulting from operations

  $ (1,040.0 ) $ 153.3   $ 245.1  

Weighted average common shares outstanding—basic

    173.0     152.9     142.4  

Dilutive options outstanding

        1.8     3.2  
               

Weighted average common shares outstanding—diluted

    173.0     154.7     145.6  
               

Basic earnings (loss) per common share

  $ (6.01 ) $ 1.00   $ 1.72  
               

Diluted earnings (loss) per common share

  $ (6.01 ) $ 0.99   $ 1.68  
               

Note 8.   Employee Compensation Plans

              The Company accrued bonuses for non-officer employees for 2008 of $1.0 million which were paid in February 2009. In addition, the Company accrued $11.2 million in performance awards in 2008 which are included in salaries and employee benefits expense. In lieu of paying these amounts as a 2008 bonus, the Company will pay these amounts in four quarterly installments ending on January 15, 2010. An employee must be employed on the quarterly payment dates in order to receive the quarterly payment.

              The Company has an Individual Performance Award plan ("IPA"), and an Individual Performance Bonus plan ("IPB", each individually a "Plan," or collectively, the "Plans"). These Plans generally are determined annually at the beginning of each year but may be adjusted throughout the year. In 2008, the IPA was paid in cash in two equal installments during the year. Through December 31, 2007, the IPA amounts were contributed into a trust and invested in the Company's common stock. The IPB was distributed in cash to award recipients throughout the year (beginning in February of each respective year) as long as the recipient remained employed by the Company. The Company currently has not established an IPA or IPB for 2009; however, depending upon the

F-179



Company's need to retain and motivate its employees, the Company may determine in conjunction with the Compensation Committee of the Board of Directors that some form of 2009 retention compensation or additional individual performance compensation may be in the best interests of the Company.

              The trusts for the IPA payments were consolidated with the Company's accounts. The common stock was classified as common stock held in deferred compensation trust in the accompanying financial statements and the deferred compensation obligation, which represented the amount owed to the employees, was included in other liabilities. Changes in the value of the Company's common stock held in the deferred compensation trust were not recognized. However, the liability was marked to market with a corresponding charge or credit to employee compensation expense.

              In December 2007, the Company's Board of Directors made a determination that it was in the best interests of the Company to terminate its deferred compensation arrangements. The Board of Directors' decision primarily was in response to increased complexity resulting from recent changes in the regulation of deferred compensation arrangements. The Board of Directors resolved that the accounts under these Plans would be distributed to participants in full on March 18, 2008, the termination and distribution date, or as soon as was reasonably practicable thereafter, in accordance with the provisions of each of these Plans.

              The accounts under the deferred compensation arrangements totaled $52.5 million at December 31, 2007. The balances on the termination date were distributed to participants in March 2008 subsequent to the termination date in accordance with the transition rule for payment elections under Section 409A of the Code. Distributions from the plans were made in cash or shares of the Company's common stock, net of required withholding taxes.

              The IPA and IPB expenses are included in employee expenses and for the years ended December 31, 2008, 2007, and 2006, were as follows:

($ in millions)
  2008   2007   2006  

IPA contributions

  $ 8.5   $ 9.8   $ 8.1  

IPA mark to market expense (benefit)

    (4.1 )   (14.0 )   2.9  
               

Total IPA expense (benefit)

  $ 4.4   $ (4.2 ) $ 11.0  
               

Total IPB expense

  $ 8.8   $ 9.5   $ 8.1  
               

Note 9.   Stock Option Plan

              The purpose of the stock option plan ("Option Plan") is to provide officers and non-officer directors of the Company with additional incentives. Options are exercisable at a price equal to the fair market value of the shares on the day the option is granted. Each option states the period or periods of time within which the option may be exercised by the optionee, which may not exceed ten years from the date the option is granted. The options granted to officers generally vest ratably over up to a three year period. Options granted to non-officer directors vest on the grant date.

              All rights to exercise options terminate 60 days after an optionee ceases to be (i) a non-officer director, (ii) both an officer and a director, if such optionee serves in both capacities, or (iii) an officer (if such officer is not also a director) of the Company for any cause other than death or total and permanent disability. In the event of a change of control of the Company, all outstanding options will become fully vested and exercisable as of the change of control.

              At December 31, 2006, there were 32.2 million shares authorized under the Option Plan. On May 15, 2007, the Company's stockholders voted to increase the number of shares of common stock authorized for issuance to 37.2 million shares. At December 31, 2008 and 2007, there were 37.2 million shares authorized under the Option Plan.

F-180


              On July 18, 2007, the Company completed a tender offer related to the Company's offer to all optionees who held vested "in-the-money" stock options as of June 20, 2007, the opportunity to receive an option cancellation payment ("OCP") equal to the "in-the-money" value of the stock options cancelled, determined using the Weighted Average Market Price of $31.75, which would be paid one-half in cash and one-half in unregistered shares of the Company's common stock. The Company accepted for cancellation 10.3 million vested options, which in the aggregate had a weighted average exercise price of $21.50. This resulted in a total option cancellation payment of approximately $105.6 million, of which $52.8 million was paid in cash and $52.8 million was paid through the issuance of 1.7 million unregistered shares of the Company's common stock, determined using the Weighted Average Market Price of $31.75. The Weighted Average Market Price represented the volume weighted average price of the Company's common stock over the fifteen trading days preceding the first day of the offer period, or June 20, 2007. See Note 2—Stock Compensation Plans.

              At December 31, 2008 and 2007, the number of shares available to be granted under the Option Plan was 9.5 million and 10.7 million, respectively.

              Information with respect to options granted, exercised and forfeited under the Option Plan for the years ended December 31, 2008, 2007, and 2006, was as follows:

(in millions, except per share amounts)
  Shares   Weighted
Average
Exercise Price
Per Share
  Weighted
Average
Contractual
Remaining
Term (Years)
  Aggregate
Intrinsic
Value at
December 31,
2008(1)
 

Options outstanding at January 1, 2006

    22.3   $ 24.52              

Granted

    1.8   $ 29.88              

Exercised

    (0.5 ) $ 22.99              

Forfeited

    (0.4 ) $ 27.67              
                         

Options outstanding at December 31, 2006

   
23.2
 
$

24.92
             

Granted

    6.7   $ 29.52              

Exercised

    (0.6 ) $ 25.25              

Cancelled in tender offer(2)

    (10.3 ) $ 21.50              

Forfeited

    (0.5 ) $ 28.96              
                         

Options outstanding at December 31, 2007

   
18.5
 
$

28.36
             
                         

Granted

    7.7   $ 22.52              

Exercised

      $              

Forfeited

    (6.5 ) $ 26.87              
                         

Options outstanding at December 31, 2008

   
19.7
 
$

26.56
   
4.82
 
$

 
                         

Exercisable at December 31, 2008(3)

   
12.3
 
$

28.14
   
4.54
 
$

 
                         

Exercisable and expected to be exercisable at December 31, 2008(4)

    17.0   $ 27.17     4.51   $  
                         

(1)
The market value of the options at December 31, 2008, exceeded the cost for the option holders to exercise the options. Accordingly, there was no aggregate intrinsic value at December 31, 2008.

(2)
See description of the tender offer above.

(3)
Represents vested options.

(4)
The amount of options expected to be exercisable at December 31, 2008, is calculated based on an estimate of expected forfeitures.

F-181


              The fair value of the shares vested during the years ended December 31, 2008, 2007, and 2006, was $13.5 million, $21.6 million, and $16.1 million, respectively. The total intrinsic value of the options exercised during the years ended December 31, 2007, and 2006, was $2.7 million, and $3.6 million, respectively. There were no options exercised during the year ended December 31, 2008.

              The following table summarizes information about stock options outstanding at December 31, 2008:

 
  Outstanding   Exercisable  
Range of Exercise Prices
  Total
Number
Outstanding
(in millions)
  Weighted
Average
Remaining
Contractual
Life (Years)
  Weighted
Average
Exercise
Price
  Total
Number
Exercisable
(in millions)
  Weighted
Average
Exercise
Price
 

$13.72–$22.78

    1.3     4.34   $ 19.47     0.7   $ 21.24  

$22.96

    5.2     5.36   $ 22.96       $  

$23.59–$27.38

    0.6     4.61   $ 25.81     0.6   $ 25.81  

$27.51

    3.9     5.18   $ 27.51     3.9   $ 27.51  

$28.98–$29.23

    3.6     4.28   $ 28.99     3.6   $ 28.99  

$29.58

    4.7     4.54   $ 29.58     3.2   $ 29.58  

$30.00–$30.52

    0.4     4.23   $ 30.26     0.3   $ 30.21  
                             

    19.7     4.82   $ 26.56     12.3   $ 28.14  
                             

              As a business development company under the 1940 Act, the Company is entitled to provide and has provided loans to the Company's officers in connection with the exercise of options. However, as a result of provisions of the Sarbanes-Oxley Act of 2002, the Company is prohibited from making new loans to its executive officers. The outstanding loans are full recourse, have varying terms not exceeding ten years, bear interest at the applicable federal interest rate in effect at the date of issue and have been recorded as a reduction to shareholders' equity. At December 31, 2008 and 2007, the Company had outstanding loans to officers of $1.1 million and $2.7 million, respectively. Officers with outstanding loans repaid principal of $1.6 million, $0.2 million, and $1.0 million, for the years ended December 31, 2008, 2007, and 2006, respectively. The Company recognized a nominal amount of interest income from these loans during the year ended December 31, 2008, and recognized $0.1 million and $0.2 million during the years ended December 31, 2007, and 2006, respectively. This interest income is included in interest and dividends for companies less than 5% owned.

Note 10. Dividends and Distributions and Taxes

              For the years ended December 31, 2008, 2007, and 2006, the Company's Board of Directors declared the following distributions:

 
  2008   2007   2006  
(in millions, except per share amounts)
  Total
Amount
  Total
Per Share
  Total
Amount
  Total
Per Share
  Total
Amount
  Total
Per Share
 

First quarter

  $ 108.1   $ 0.65   $ 95.8   $ 0.63   $ 82.5   $ 0.59  

Second quarter

    116.1     0.65     97.6     0.64     84.1     0.60  

Third quarter

    116.1     0.65     100.3     0.65     88.8     0.61  

Fourth quarter

    116.2     0.65     102.6     0.65     92.0     0.62  

Extra dividend

            11.0     0.07     7.5     0.05  
                           

Total distributions to common shareholders

  $ 456.5   $ 2.60   $ 407.3   $ 2.64   $ 354.9   $ 2.47  
                           

F-182


              For income tax purposes, distributions for 2008, 2007, and 2006, were composed of the following:

 
  2008   2007   2006  
(in millions, except per share amounts)
  Total
Amount
  Total
Per Share
  Total
Amount
  Total
Per Share
  Total
Amount
  Total
Per Share
 

Ordinary income(1)(2)

  $ 104.0   $ 0.59   $ 126.7   $ 0.82   $ 177.4   $ 1.23  

Long-term capital gains

    352.5     2.01     280.6     1.82     177.5     1.24  
                           

Total distributions to common shareholders

  $ 456.5   $ 2.60   $ 407.3   $ 2.64   $ 354.9   $ 2.47  
                           

(1)
For the years ended December 31, 2008, 2007, and 2006, ordinary income included dividend income of approximately $0.06, zero, and $0.04 per share, respectively, that qualified to be taxed at the 15% maximum capital gains rate.

(2)
For certain eligible corporate shareholders, dividends eligible for the dividend received deduction for 2008, 2007, and 2006, was $0.056, zero, and $0.042 per share, respectively.

              The following table summarizes the differences between financial statement net increase (decrease) in net assets resulting from operations and taxable income available for distribution to shareholders for the years ended December 31, 2008, 2007, and 2006:

($ in millions)
  2008   2007   2006  
 
  (ESTIMATED)(1)
   
   
 

Financial statement net increase (decrease) in net assets resulting from operations

  $ (1,040.0 ) $ 153.3   $ 245.1  

Adjustments:

                   

Net change in unrealized appreciation or depreciation

    1,123.8     256.2     477.4  

Interest- and dividend-related items

    (2.8 )   13.8     10.2  

Employee compensation-related items

    0.8     0.7     23.1  

Nondeductible excise tax

    (0.6 )   16.3     15.4  

Realized gains recognized (deferred) through installment treatment(2)

    17.9     (13.0 )   (182.3 )

Other gain or loss related items

    (91.2 )   (10.2 )   15.0  

Net income (loss) from partnerships and limited liability companies(3)

    (4.3 )   (22.7 )   (4.7 )

Net capital loss carryforward

    30.6          

Net (income) loss from consolidated subsidiaries, net of tax

    (0.7 )   2.7     3.9  

Other

        0.7     (1.9 )
               

Taxable income

  $ 33.5   $ 397.8   $ 601.2  
               

(1)
The Company's taxable income for 2008 is an estimate and will not be finally determined until the Company files its 2008 tax return in September 2009. Therefore, the final taxable income may be different than this estimate.

(2)
2006 includes the deferral of long-term capital gains through installment treatment related to the Company's sale of its control equity investment in Advantage and certain other portfolio companies.

(3)
Includes taxable income (loss) passed through to the Company from Ciena Capital LLC (Ciena) and related entities in excess of interest and related portfolio income from Ciena included in the financial statements totaling ($1.9) million, ($22.6) million, and $3.7 million for the years ended December 31, 2008, 2007, and 2006, respectively. See Note 3 for additional related disclosure.

F-183


              Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized.

              The Company must distribute at least 90% of its investment company taxable income to qualify for pass-through tax treatment and maintain its RIC status. The Company has distributed sufficient dividends to eliminate taxable income. Dividends declared and paid by the Company in a year generally differ from taxable income for that year as such dividends may include the distribution of current year taxable income, less amounts carried over into the following year, and the distribution of prior year taxable income carried over into and distributed in the current year. For income tax purposes, distributions for 2008, 2007, and 2006, were made from taxable income as follows:

($ in millions)
  2008   2007   2006  
 
  (ESTIMATED)(1)
   
   
 

Taxable income

  $ 33.5   $ 397.8   $ 601.2  

Taxable income earned in prior year and carried forward and distributed in current year

    393.3     402.8     156.5  

Taxable income earned in current year and carried forward for distribution in next year(2)

        (393.3 )   (402.8 )

Distributions from accumulated earnings

    29.7          
               

Total distributions to common shareholders

  $ 456.5   $ 407.3   $ 354.9  
               

(1)
The Company's taxable income for 2008 is an estimate and will not be finally determined until the Company files its 2008 tax return in September 2009.

              The Company generally will be required to pay an excise tax equal to 4% of the amount by which 98% of the Company's annual taxable income exceeds the distributions for the year. In 2007 and 2006 annual taxable income was in excess of the Company's dividend distributions from such taxable income in those respective years, and accordingly, the Company had an excise tax expense of $16.3 million and $15.1 million, respectively, on the excess taxable income carried forward. As of December 31, 2008 the Company estimates it has met its dividend distribution requirement for the 2008 tax year, therefore, it has not recorded an excise tax for the year ended December 31, 2008. In certain circumstances, the Company is restricted in its ability to pay dividends. Each of the Company's private notes and the Company's revolving credit facility contain provisions that limit the amount of dividends the Company can pay and have a covenant that requires a minimum 200% asset coverage ratio at all times, and at December 31, 2008, the Company was in default of that covenant (see Note 1). During the continuance of an event of default, the Company is precluded from declaring dividends or other distributions to its shareholders. In addition, pursuant to the 1940 Act, the Company may be precluded from declaring dividends or other distributions to its shareholders unless the Company's asset coverage is at least 200%.

              The Company currently estimates that it has cumulative deferred taxable income related to installment sale gains of approximately $217.4 million as of December 31, 2008. These gains have been recognized for financial reporting purposes in the respective years they were realized, but are generally deferred for tax purposes until the notes or other amounts received from the sale of the related investments are collected in cash. The recognition of installment sales gains as of December 31, 2008 are estimates and will not be finally determined until the Company files its 2008 tax return in September 2009.

F-184


              The Company's undistributed book earnings of $184.7 million as of December 31, 2008, resulted from undistributed ordinary income and long-term capital gains. The difference between undistributed book earnings at the end of the year and taxable income carried over from the current year into the next year relates to a variety of timing and permanent differences in the recognition of income and expenses for book and tax purposes as discussed above.

              At December 31, 2008 and 2007, the aggregate gross unrealized appreciation of the Company's investments above cost for federal income tax purposes was $348.5 million (estimated) and $609.4 million, respectively. At December 31, 2008 and 2007, the aggregate gross unrealized depreciation of the Company's investments below cost for federal income tax purposes was $1.4 billion (estimated) and $630.3 million, respectively. The Company's investments as compared to cost for federal income tax purposes was net unrealized depreciation of $1.1 billion (estimated) and $20.9 million at December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, the aggregate cost of securities, for federal income tax purposes was $4.5 billion (estimated) and $4.8 billion, respectively.

              The Company's consolidated subsidiary, AC Corp, is subject to federal and state income taxes. For the years ended December 31, 2008, 2007, and 2006, AC Corp's income tax expense (benefit) was $3.1 million, $(2.7) million, and $(0.1) million, respectively. For the year ended December 31, 2008, paid in capital was decreased by $3.0 million primarily for the reduction of the deferred tax asset related to stock options that expired unexercised. For the year ended December 31, 2007, paid in capital was increased for the tax benefit of amounts deducted for tax purposes but not for financial reporting purposes primarily related to stock-based compensation by $10.9 million.

              The net deferred tax asset at December 31, 2008, was $15.0 million, consisting of deferred tax assets of $32.2 million and deferred tax liabilities of $17.2 million. The net deferred tax asset at December 31, 2007, was $18.4 million, consisting of deferred tax assets of $26.5 million and deferred tax liabilities of $8.1 million. At December 31, 2008, the deferred tax assets primarily related to compensation-related items and the deferred tax liabilities primarily related to depreciation. Management believes that the realization of the net deferred tax asset is more likely than not based on expectations as to future taxable income and scheduled reversals of temporary differences. Accordingly, the Company did not record a valuation allowance at December 31, 2008 or 2007.

Note 11. Cash

              The Company places its cash with financial institutions and, at times, cash held in checking accounts in financial institutions may be in excess of the Federal Deposit Insurance Corporation insured limit.

              At December 31, 2008 and 2007, cash consisted of the following:

($ in millions)
  2008   2007  

Cash

  $ 51.9   $ 4.6  

Less escrows held

    (1.5 )   (1.1 )
           

Total cash

  $ 50.4   $ 3.5  
           

Note 12. Supplemental Disclosure of Cash Flow Information

              The Company paid interest of $161.0 million, $123.5 million, and $90.6 million, respectively, for the years ended December 31, 2008, 2007, and 2006. The Company paid income taxes, including excise taxes (net of refunds), of $10.1 million, $18.8 million and $10.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.

F-185


              Non-cash operating activities for the years ended December 31, 2008, 2007 and 2006, totaled $117.8 million, $142.2 million, and $315.9 million, respectively. Non-cash operating activities include investments funded for the year ended December 31, 2008, which included $8.1 million in debt investments in a portfolio company received in a subordinated debt exchange. Non-cash operating activities for the year ended December 31, 2006, included a note received as consideration from the sale of the Company's equity investment in Advantage of $150.0 million and a note received as consideration from the sale of the Company's equity investment in STS Operating, Inc. of $30.0 million.

              Non-cash financing activities included the issuance of common stock in lieu of cash distributions totaling $3.8 million, $17.1 million, and $15.0 million, for the years ended December 31, 2008, 2007, and 2006, respectively. Non-cash financing activities for the year ended December 31, 2007, also included the payment of one-half of the value of the option cancellation payment in connection with the tender offer, or $52.8 million, through the issuance of 1.7 million unregistered shares of the Company's common stock. See Notes 2 and 9.

Note 13. Financial Highlights

 
  At and for the Years Ended
December 31,
 
 
  2008   2007   2006  

Per Common Share Data

                   

Net asset value, beginning of year

  $ 17.54   $ 19.12   $ 19.17  
               

Net investment income(1)

    1.23     0.91     1.30  

Net realized gains (losses)(1)(2)

    (0.75 )   1.74     3.66  
               

Net investment income plus net realized gains (losses)(1)

    0.48     2.65     4.96  

Net change in unrealized appreciation or depreciation(1)(2)

    (6.49 )   (1.66 )   (3.28 )
               

Net increase (decrease) in net assets resulting from operations(1)

    (6.01 )   0.99     1.68  

Decrease in net assets from shareholder distributions

    (2.60 )   (2.64 )   (2.47 )

Net increase in net assets from capital share transactions(1)(3)

    0.69     0.41     0.74  

Decrease in net assets from cash portion of the option cancellation payment(1)(4)

        (0.34 )    
               

Net asset value, end of year

  $ 9.62   $ 17.54   $ 19.12  
               

Market value, end of year

  $ 2.69   $ 21.50   $ 32.68  

Total return(5)

    (82.5 )%   (27.6 )%   20.6 %

F-186


 
  At and for the Years Ended
December 31,
 
 
  2008   2007   2006  

Ratios and Supplemental Data
($ and shares in millions, except per share amounts)

                   

Ending net assets

  $ 1,718.4   $ 2,771.8   $ 2,841.2  

Common shares outstanding at end of year

    178.7     158.0     148.6  

Diluted weighted average common shares outstanding

    173.0     154.7     145.6  

Employee, employee stock option and administrative expenses/average net assets

    5.47 %   6.10 %   5.38 %

Total operating expenses/average net assets

    11.39 %   10.70 %   9.05 %

Income tax expense including excise tax/average net assets

    0.10 %   0.47 %   0.56 %

Net investment income/average net assets

    8.47 %   4.91 %   6.90 %

Net increase (decrease) in net assets resulting from operations/average net assets

    (41.34 )%   5.34 %   8.94 %

Portfolio turnover rate

    24.00 %   26.84 %   27.05 %

Average debt outstanding

  $ 2,091.6   $ 1,924.2   $ 1,491.0  

Average debt per share(1)

  $ 12.09   $ 12.44   $ 10.24  

(1)
Based on diluted weighted average number of common shares outstanding for the year.

(2)
Net realized gains (losses) and net change in unrealized appreciation or depreciation can fluctuate significantly from year to year.

(3)
Excludes capital share transactions related to the cash portion of the option cancellation payment.

(4)
See Notes 2 and 9 to the consolidated financial statements above for further discussion.

(5)
Total return assumes the reinvestment of all dividends paid for the years presented.

Note 14. Selected Quarterly Data (Unaudited)

 
  2008  
($ in millions, except per share amounts)
  Qtr. 1   Qtr. 2   Qtr. 3   Qtr. 4  

Total interest and related portfolio income

  $ 144.9   $ 134.6   $ 120.7   $ 102.1  

Net investment income

  $ 69.5   $ 63.9   $ 45.6   $ 34.2  

Net increase (decrease) in net assets resulting from operations

  $ (40.7 ) $ (102.2 ) $ (318.3 ) $ (578.8 )

Basic earnings (loss) per common share

  $ (0.25 ) $ (0.59 ) $ (1.78 ) $ (3.24 )

Diluted earnings (loss) per common share

  $ (0.25 ) $ (0.59 ) $ (1.78 ) $ (3.24 )

 

 
  2007  
 
  Qtr. 1   Qtr. 2   Qtr. 3   Qtr. 4  

Total interest and related portfolio income

  $ 108.0   $ 117.7   $ 118.4   $ 117.7  

Net investment income

  $ 39.5   $ 25.2   $ 18.3   $ 58.0  

Net increase (decrease) in net assets resulting from operations

  $ 133.1   $ 89.2   $ (96.5 ) $ 27.5  

Basic earnings (loss) per common share

  $ 0.89   $ 0.59   $ (0.63 ) $ 0.18  

Diluted earnings (loss) per common share

  $ 0.87   $ 0.57   $ (0.63 ) $ 0.18  

Note 15. Litigation

              On June 23, 2004, the Company was notified by the SEC that the SEC was conducting an informal investigation of the Company. The investigation related to the valuation of securities in the Company's private finance portfolio and other matters. On June 20, 2007, the Company announced

F-187



that it entered into a settlement with the SEC that resolved the SEC's informal investigation. As part of the settlement and without admitting or denying the SEC's allegations, the Company agreed to the entry of an administrative order. In the order the SEC alleged that, between June 30, 2001, and March 31, 2003, the Company did not maintain books, records and accounts which, in reasonable detail, supported or accurately and fairly reflected valuations of certain securities in the Company's private finance portfolio and, as a result, did not meet certain recordkeeping and internal controls provisions of the federal securities laws. In the administrative order, the SEC ordered the Company to continue to maintain certain of its current valuation-related controls. Specifically, for a period of two years, the Company has undertaken to: (1) continue to employ a Chief Valuation Officer, or a similarly structured officer-level employee, to oversee its quarterly valuation processes; and (2) continue to employ third-party valuation consultants to assist in its quarterly valuation processes.

              On December 22, 2004, the Company received letters from the U.S. Attorney for the District of Columbia requesting the preservation and production of information regarding the Company and Business Loan Express, LLC (currently known as Ciena Capital LLC) in connection with a criminal investigation relating to matters similar to those investigated by and settled with the SEC as discussed above. The Company produced materials in response to the requests from the U.S. Attorney's office and certain current and former employees were interviewed by the U.S. Attorney's Office. The Company has voluntarily cooperated with the investigation.

              In late December 2006, the Company received a subpoena from the U.S. Attorney for the District of Columbia requesting, among other things, the production of records regarding the use of private investigators by the Company or its agents. The Board established a committee, which was advised by its own counsel, to review this matter. In the course of gathering documents responsive to the subpoena, the Company became aware that an agent of the Company obtained what were represented to be telephone records of David Einhorn and which purport to be records of calls from Greenlight Capital during a period of time in 2005. Also, while the Company was gathering documents responsive to the subpoena, allegations were made that the Company's management had authorized the acquisition of these records and that management was subsequently advised that these records had been obtained. The Company's management has stated that these allegations are not true. The Company has cooperated fully with the inquiry by the U.S. Attorney's Office.

              On February 26, 2007, Dana Ross filed a class action complaint in the U.S. District Court for the District of Columbia in which she alleges that Allied Capital Corporation and certain members of management violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Thereafter, the court appointed new lead counsel and approved new lead plaintiffs. On July 30, 2007, plaintiffs served an amended complaint. Plaintiffs claim that, between November 7, 2005, and January 22, 2007, Allied Capital either failed to disclose or misrepresented information about its portfolio company, Business Loan Express, LLC. Plaintiffs seek unspecified compensatory and other damages, as well as other relief. The Company believes the lawsuit is without merit, and intends to defend the lawsuit vigorously. On September 13, 2007, the Company filed a motion to dismiss the lawsuit. The motion is pending.

              On October 6, 2008, Rena Nadoff filed a shareholder derivative action in the Superior Court of the District of Columbia, captioned Rena Nadoff v. Walton, et al., 2008 CA 007108, seeking unspecified compensatory and other damages, as well as equitable relief on behalf of Allied Capital Corporation. Ms. Nadoff's suit is substantially similar to a derivative action she filed in February 2007, which the Court dismissed in July 2007. Ms. Nadoff sent a letter to the Company's Board of Directors on October 5, 2007, reciting substantially the same claims and requesting that the Board of Directors investigate her allegations and take appropriate action. The Board of Directors subsequently established a committee, which engaged and was advised by its own counsel, to review the matter. The Board's committee evaluated the allegations in Ms. Nadoff's October 5 letter and recommended that the Board take no further action. After considering both Ms. Nadoff's request and the committee's

F-188



recommendation, the Board accepted the recommendation. On November 26, 2008, the Company filed a motion to dismiss the second Nadoff lawsuit. On February 3, 2009, the Court denied the motion to dismiss but ordered Ms. Nadoff to file an amended complaint that clearly identifies and sets forth the breaches of fiduciary duty, if any, that are alleged to have occurred after the filing (or dismissal) of the first Nadoff derivative lawsuit. On February 17, 2009, the plaintiff filed an amended complaint as ordered by the Court. The complaint alleges breaches of fiduciary duty by the Board of Directors. The Company intends to file a motion to dismiss.

              In addition, the Company is party to certain lawsuits in the normal course of business. Furthermore, third parties may try to seek to impose liability on the Company in connection with the activities of its portfolio companies. For a discussion of civil investigations being conducted regarding the lending practice of Ciena Capital LLC, a portfolio company of the Company, see "Note 3, Portfolio—Ciena Capital LLC."

              While the outcome of any of the open legal proceedings described above cannot at this time be predicted with certainty, the Company does not expect these matters will materially affect its financial condition or results of operations.

F-189



Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Allied Capital Corporation:

              Under date of March 2, 2009, we reported on the consolidated balance sheet of Allied Capital Corporation and subsidiaries as of December 31, 2008 and 2007, including the consolidated statements of investments as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in net assets and cash flows, and the financial highlights (included in Note 13), for each of the years in the three-year period ended December 31, 2008, which are included in this registration statement. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as of and for the year ended December 31, 2008. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit.

              In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.

LOGO

Washington, D.C.
March 2, 2009

F-190



Schedule 12-14


ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES

 
   
  Amount of Interest
or Dividends
   
   
   
   
 
PRIVATE FINANCE
Portfolio Company
(in thousands)
  Investment(1)   Credited
to Income(6)
  Other(2)   December 31,
2007
Value
  Gross
Additions(3)
  Gross
Reductions(4)
  December 31,
2008
Value
 

Companies More Than 25% Owned

                                         

AGILE Fund I, LLC

 

Equity Interests

             
$

 
$

861
 
$

(364

)

$

497
 
 

(Private Equity Fund)

                                         

Alaris Consulting, LLC

 

Senior Loan

               
   
26,987
   
(26,987

)
 
 
 

(Business Services)

  Equity Interests                     6,738     (6,738 )    

AllBridge Financial, LLC

 

Equity Interests

               
7,800
   
25,495
   
(22,335

)
 
10,960
 
 

(Asset Management)

                                         

Allied Capital Senior Debt Fund, L.P.

 

Equity Interests

               
32,811
   
   
(1,011

)
 
31,800
 
 

(Private Debt Fund)

                                         

Avborne, Inc. 

 

Preferred Stock

               
1,633
   
   
(691

)
 
942
 
 

(Business Services)

  Common Stock                              

Avborne Heavy Maintenance, Inc. 

 

Preferred Stock

               
2,557
   
   
(2,557

)
 
 
 

(Business Services)

  Common Stock                 370         (370 )    

Aviation Properties Corporation

 

Common Stock

               
   
28
   
(28

)
 
 
 

(Business Services)

                                         

Border Foods, Inc. 

 

Senior Loan

 
$

2,784
         
   
49,195
   
(16,168

)
 
33,027
 
 

(Consumer Products)

  Preferred Stock                 4,648     7,203         11,851  

  Common Stock                              

Calder Capital Partners, LLC

 

Senior Loan(5)

       
$

323
   
3,035
   
2,349
   
(4,431

)
 
953
 
 

(Asset Management)

  Equity Interests                 3,559     57     (3,616 )    

Callidus Capital Corporation

 

Senior Loan

   
115
         
   
1,750
   
(1,750

)
 
 
 

(Asset Management)

  Subordinated Debt     1,838           6,871     13,197     (4,000 )   16,068  

  Common Stock                 44,587     115     (10,325 )   34,377  

Ciena Capital LLC

 

Senior Loan(5)

               
   
319,031
   
(214,148

)
 
104,883
 
 

(Financial Services)

  Class A Equity                                      

  Interests                 68,609     30,435     (99,044 )    

  Class B Equity                                      

  Interests                              

  Class C Equity                                      

  Interests                              

CitiPostal Inc. 

 

Senior Loan

   
47
         
679
   
2
   
   
681
 
 

(Business Services)

  Unitranche Debt     6,326           50,597     951         51,548  

  Subordinated Debt     1,398           8,049     1,065         9,114  

  Common Stock     109           12,726         (4,110 )   8,616  

Coverall North America, Inc. 

 

Unitranche Debt

   
3,974
         
34,923
   
44
   
(3,019

)
 
31,948
 
 

(Business Services)

  Subordinated Debt     858           5,979     7     (437 )   5,549  

  Common Stock                 27,597         (9,629 )   17,968  

CR Holding, Inc. 

 

Subordinated Debt(5)

   
4,936
         
40,812
   
1,388
   
(24,840

)
 
17,360
 
 

(Consumer Products)

  Common Stock                 40,934         (40,934 )    

Crescent Equity Corp. 

 

Senior Loan

   
44
         
433
   
11
   
(11

)
 
433
 
 

(Business Services)

  Subordinated Debt     3,183           33,215     783     (19,715 )   14,283  

  Subordinated Debt(5)                 11,345     1,194     (8,208 )   4,331  

  Common Stock     36           83,453     4,559     (83,432 )   4,580  

F-191


 
   
  Amount of Interest
or Dividends
   
   
   
   
 
PRIVATE FINANCE
Portfolio Company
(in thousands)
  Investment(1)   Credited
to Income(6)
  Other(2)   December 31,
2007
Value
  Gross
Additions(3)
  Gross
Reductions(4)
  December 31,
2008
Value
 

Direct Capital Corporation

 

Subordinated Debt(5)

  $ 5,886         $ 39,030   $ 19,430   $ (44,930 ) $ 13,530  
 

(Financial Services)

  Common Stock                 6,906     9,126     (16,032 )    

Financial Pacific Company

 

Subordinated Debt

   
11,686
         
72,850
   
1,304
   
(11,965

)
 
62,189
 
 

(Financial Services)

  Preferred Stock     1,281           19,330         (19,330 )    

  Common Stock                 38,544         (38,544 )    

ForeSite Towers, LLC

 

Equity Interest

               
878
   
11
   
   
889
 
 

(Tower Leasing)

                                         

Global Communications, LLC

 

Senior Loan(5)

               
1,822
   
   
(487

)
 
1,335
 
 

(Business Services)

                                         

Hot Light Brands, Inc. 

 

Senior Loan(5)

               
   
30,567
   
(16,889

)
 
13,678
 
 

(Retail)

  Common Stock                     5,151     (5,151 )    

Hot Stuff Foods, LLC

 

Senior Loan

   
3,484
         
50,752
   
3,143
   
(11,517

)
 
42,378
 
 

(Consumer Products)

  Subordinated Debt(5)     1,584           31,244     1,335     (32,579 )    

  Common Stock                              

Huddle House, Inc. 

 

Subordinated Debt

   
8,689
         
59,618
   
1,804
   
(4,355

)
 
57,067
 
 

(Retail)

  Common Stock                 44,154         (23,232 )   20,922  

IAT Equity, LLC and Affiliates

                                         
 

d/b/a Industrial Air Tool

  Subordinated Debt     285               6,000         6,000  
 

(Industrial Products)

  Common Stock                     8,860         8,860  

Impact Innovations Group, LLC

 

Equity Interests

                                     
 

(Business Services)

  in Affiliate                 320     1         321  

Insight Pharmaceuticals Corporation

 

Subordinated Debt

   
7,808
         
45,041
   
1,994
   
(1,208

)
 
45,827
 
 

(Consumer Products)

  Subordinated Debt(5)                 16,796     741     (5 )   17,532  

  Preferred Stock                 1,462     2,606         4,068  

  Common Stock                              

Jakel, Inc. 

 

Subordinated Debt(5)

               
1,563
   
   
(1,189

)
 
374
 
 

(Industrial Products)

                                         

Knightsbridge CLO 2007-1 Ltd.(8)

 

Class E Notes

   
1,993
         
   
21,985
   
(7,119

)
 
14,866
 
 

(CLO)

  Income Notes     4,801               40,735     (5,521 )   35,214  

Knightsbridge CLO 2008-1 Ltd. 

 

Class C Notes

   
782
         
   
16,000
   
(3,200

)
 
12,800
 
 

(CLO)

  Class D Notes     535               10,000     (2,000 )   8,000  

  Class E Notes     700               13,873     (3,300 )   10,573  

  Income Notes     1,943               33,467     (12,152 )   21,315  

Legacy Partners Group, Inc. 

 

Senior Loan

               
3,843
   
   
(3,843

)
 
 
 

(Business Services)

  Equity Interests                 1,332     168     (1,500 )    

  Common Stock                     2,773     (2,773 )    

Litterer Beteiligungs-GmbH

 

Subordinated Debt

   
30
         
772
   
56
   
(828

)
 
 
 

(Business Services)

  Equity Interest                 700     1,110     (1,810 )    

MHF Logistical Solutions, Inc.(7)

 

Subordinated Debt(5)

               
   
14,329
   
(14,329

)
 
 
 

(Business Services)

  Preferred Stock                              

  Common Stock                              

MVL Group, Inc. 

 

Senior Loan

   
3,704
         
30,639
   
24
   
   
30,663
 
 

(Business Services)

  Subordinated Debt     6,164           39,802     1,192         40,994  

  Subordinated Debt(5)                 141         (55 )   86  

  Common Stock                 4,949         (4,949 )    

Old Orchard Brands, LLC

 

Subordinated Debt

   
3,422
         
19,544
   
766
   
(1,428

)
 
18,882
 
 

(Consumer Products)

  Equity Interests     1,000           25,419     4,254     (1,910 )   27,763  

Penn Detroit Diesel Allison, LLC

 

Subordinated Debt

   
5,858
         
39,180
   
1,572
   
(2,883

)
 
37,869
 
 

(Business Services)

  Equity Interests                 37,965     25     (16,890 )   21,100  

F-192


 
   
  Amount of Interest
or Dividends
   
   
   
   
 
PRIVATE FINANCE
Portfolio Company
(in thousands)
  Investment(1)   Credited
to Income(6)
  Other(2)   December 31,
2007
Value
  Gross
Additions(3)
  Gross
Reductions(4)
  December 31,
2008
Value
 

Powell Plant Farms, Inc. 

 

Senior Loan

              $ 1,534   $   $ (1,534 ) $  
 

(Consumer Products)

                                         

Service Champ, Inc. 

 

Subordinated Debt

 
$

4,283
         
28,351
   
716
   
(2,083

)
 
26,984
 
 

(Business Services)

  Common Stock                 26,292         (5,136 )   21,156  

Staffing Partners Holding Company, Inc.

 

Subordinated Debt

               
223
   
286
   
(509

)
 
 
 

(Business Services)

                                         

Stag-Parkway, Inc.(10)

 

Unitranche Debt

   
195
         
   
17,962
   
   
17,962
 
 

(Business Services)

  Common Stock                     21,010     (14,042 )   6,968  

Startec Equity, LLC

 

Equity Interests

               
430
   
20
   
(118

)
 
332
 
 

(Telecommunications)

                                         

Sweet Traditions, Inc. 

 

Senior Loan

               
35,229
   
4,865
   
(40,094

)
 
 
 

(Retail)

  Preferred Stock                     950     (950 )    

  Common Stock                     50     (50 )    

Unitranche Fund LLC

 

Subordinated

   
8,321
         
744
   
124,679
   
   
125,423
 
 

(Private Debt Fund)

  Certificates
Equity Interests
                1             1  

Worldwide Express Operations, LLC

 

Subordinated Debt(5)

   
310
         
2,670
   
265
   
(903

)
 
2,032
 
 

(Business Services)

  Equity Interests     796           21,516         (21,516 )    

  Warrants                 272         (272 )    
                                     

Total companies more than 25% owned

     
$

111,188
       
$

1,279,080
             
$

1,187,722
 
                                     

Companies 5% to 25% Owned

                                         

10th Street, LLC

 

Subordinated Debt

 
$

2,764
       
$

20,645
 
$

794
 
$

 
$

21,439
 
 

(Business Services)

  Equity Interests                 1,100     1     (126 )   975  

  Option                     25         25  

Advantage Sales & Marketing, Inc.

 

Subordinated Debt

   
19,202
         
154,854
   
3,278
   
(23,132

)
 
135,000
 
 

(Business Services)

  Equity Interests                 10,973         (5,973 )   5,000  

Air Medical Group Holdings LLC

 

Senior Loan

   
230
         
2,980
   
13,025
   
(12,866

)
 
3,139
 
 

(Healthcare Services)

  Equity Interests     1,010           10,800     476     (476 )   10,800  

Alpine ESP Holdings, Inc. 

 

Preferred Stock

   
169
         
749
   
170
   
(919

)
 
 
 

(Business Services)

  Common Stock                 262     1     (263 )    

Amerex Group, LLC

 

Subordinated Debt

   
2,443
         
8,400
   
995
   
(611

)
 
8,784
 
 

(Consumer Products)

  Equity Interests     2,349           13,713         (3,781 )   9,932  

BB&T Capital Partners/Windsor

                                         
 

Mezzanine Fund, LLC

  Equity Interests                 11,467     51     (455 )   11,063  
 

(Private Equity Fund)

                                         

Becker Underwood, Inc. 

 

Subordinated Debt

   
3,739
         
24,798
   
704
   
   
25,502
 
 

(Industrial Products)

  Common Stock                 4,190         (1,923 )   2,267  

BI Incorporated

 

Subordinated Debt

   
2,722
         
30,499
   
116
   
(30,615

)
 
 
 

(Business Services)

  Common Stock                 7,382         (7,382 )    

Creative Group, Inc. 

 

Subordinated Debt

               
6,197
   
8,877
   
(15,074

)
 
 
 

(Business Services)

  Common Stock                              

  Warrant                              

Drew Foam Companies, Inc. 

 

Preferred Stock

               
396
   
215
   
(99

)
 
512
 
 

(Business Services)

  Common Stock                     1     (1 )    

Driven Brands, Inc.(11)

 

Subordinated Debt

   
2,669
         
   
83,698
   
   
83,698
 
 

(Consumer Services)

  Common Stock                     9,516     (4,661 )   4,855  

F-193


 
   
  Amount of Interest
or Dividends
   
   
   
   
 
PRIVATE FINANCE
Portfolio Company
(in thousands)
  Investment(1)   Credited
to Income(6)
  Other(2)   December 31,
2007
Value
  Gross
Additions(3)
  Gross
Reductions(4)
  December 31,
2008
Value
 

Hilden America, Inc. 

 

Common Stock

              $   $ 454   $ (378 ) $ 76  
 

(Consumer Products)

                                         

Lydall Transport, Ltd. 

 

Equity Interests

               
   
432
   
(87

)
 
345
 
 

(Business Services)

                                         

MedBridge Healthcare, LLC

 

Senior Loan

 
$

749
 
$

372
   
7,164
   
   
(7,164

)
 
 
 

(Healthcare Services)

  Subordinated Debt           31     2,406     3,762     (6,168 )    

  Convertible                                      

  Subordinated Debt                              

  Equity Interests                     1,425     (1,425 )    

MHF Logistical Solutions, Inc.(7)

 

Subordinated Debt(5)

               
9,280
   
   
(9,280

)
 
 
 

(Business Services)

  Common Stock                              

  Warrants                              

Multi-Ad Services, Inc. 

 

Unitranche Debt

   
1,076
         
19,704
   
73
   
(16,836

)
 
2,941
 
 

(Business Services)

  Equity Interests                 940     1,116     (274 )   1,782  

Progressive International Corporation

 

Subordinated Debt

   
131
         
1,545
   
40
   
(1,585

)
 
 
 

(Consumer Products)

  Preferred Stock                 1,038     87         1,125  

  Common Stock                 4,900         (300 )   4,600  

  Warrants                              

Regency Healthcare Group, LLC

 

Senior Loan

   
3
         
   
   
   
 
 

(Healthcare Services)

  Unitranche Debt     1,291           11,941     10     (1,126 )   10,825  

  Equity Interests     25           1,681     575     (206 )   2,050  

SGT India Private Limited

 

Common Stock

               
3,075
   
38
   
(3,113

)
 
 
 

(Business Services)

                                         

Soteria Imaging Services, LLC

 

Subordinated Debt

   
1,730
         
13,744
   
1,923
   
(11,613

)
 
4,054
 
 

(Healthcare Services)

  Equity Interests     74           2,686     10     (725 )   1,971  

Triax Holdings, LLC(9)

 

Subordinated Debt(5)

               
   
10,389
   
(10,389

)
 
 
 

(Consumer Products)

  Equity Interests                     42,114     (42,114 )    

Universal Environmental Services, LLC

 

Equity Interests

               
   
249
   
(249

)
 
 
 

(Business Services)

                                         
                                     

Total companies 5% to 25% owned

      $ 42,376         $ 389,509               $ 352,760  
                                     

This schedule should be read in conjunction with the Company's consolidated financial statements, including the consolidated statement of investments and Note 3 to the consolidated financial statements. Note 3 includes additional information regarding activities in the private finance portfolio.

(1)
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. The principal amount for loans and debt securities and the number of shares of common stock and preferred stock is shown in the consolidated statement of investments as of December 31, 2008.

(2)
Other includes interest, dividend, or other income which was applied to the principal of the investment and therefore reduced the total investment. These reductions are also included in the Gross Reductions for the investment, as applicable.

(3)
Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and closing fees, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation.

(4)
Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation.

(5)
Loan or debt security is on non-accrual status at December 31, 2008, and is therefore considered non-income producing. Loans or debt securities on non-accrual status at the end of the period may or may not have been on non-accrual status for the full period.

F-194


(6)
Represents the total amount of interest or dividends credited to income for the portion of the year an investment was included in the companies more than 25% owned or companies 5% to 25% owned categories, respectively.

(7)
In the first quarter of 2008, the Company exercised its option to acquire a majority of the voting securities of MHF Logistical Solutions, Inc. (MHF). Therefore, MHF was reclassified to companies more than 25% owned in the first quarter of 2008. At December 31, 2007, the Company's investment in MHF was included in the companies 5% to 25% owned category.

(8)
On March 31, 2008, the Company assumed the management of Knightsbridge CLO 2007-1. Therefore, this investment was reclassified to companies more than 25% owned. At December 31, 2007, this investment was included in the companies 5% to 25% owned category.

(9)
During the year ended December 31, 2008, the Company's equity interests in Triax Holding, LLC received voting rights. Therefore this investment was reclassified to companies 5% to 25% owned.

(10)
In November 2008, the Company foreclosed on the common stock of Stag-Parkway, Inc. ("Stag-Parkway"). Therefore, Stag-Parkway was reclassified to companies more than 25% owned in the fourth quarter. At December 31, 2007 Stag-Parkway was included in the companies less than 5% owned category.

(11)
In October 2008, the Company sold its investment in Driven Brands, Inc. ("Driven Brands") and re-invested in the voting common stock of Driven Brands. Therefore, this investment was reclassified to companies 5% to 25% owned. At December 31, 2007 Driven Brands was included in the companies less than 5% owned category.

F-195



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in thousands, except per share amounts)

 
  September 30, 2009   December 31, 2008  
 
  (unaudited)
   
 

ASSETS

             

Portfolio at value:

             

Private finance

             

Companies more than 25% owned (cost: 2009-$2,025,850; 2008-$2,167,020)

  $ 1,032,018   $ 1,187,722  

Companies 5% to 25% owned (cost: 2009-$219,671; 2008-$392,516)

    178,253     352,760  

Companies less than 5% owned (cost: 2009-$1,948,748; 2008-$2,317,856)

    1,232,400     1,858,581  
           

Total private finance (cost: 2009-$4,194,269; 2008-$4,877,392)

   
2,442,671
   
3,399,063
 

Commercial real estate finance (cost: 2009-$74,066; 2008-$85,503)

    68,523     93,887  
           

Total portfolio at value (cost: 2009-$4,268,335; 2008-4,962,895)

   
2,511,194
   
3,492,950
 

Accrued interest and dividends receivable

    49,953     55,638  

Other assets

    125,653     122,909  

Investments in money market and other securities

    90,020     287  

Cash and cash equivalents

    62,737     50,402  

Restricted cash

    659      
           

Total assets

  $ 2,840,216   $ 3,722,186  
           

LIABILITIES AND SHAREHOLDERS' EQUITY

             

Liabilities:

             

Notes payable (principal amount: 2009-$1,586,513; 2008-$1,895,000) (maturing within one year: 2009-$253,745; 2008-$1,015,000)

  $ 1,543,867   $ 1,895,000  

Bank term debt (former revolver)

    50,000     50,000  

Accounts payable and other liabilities

    45,084     58,786  
           

Total liabilities

   
1,638,951
   
2,003,786
 
           

Commitments and contingencies

             

Shareholders' equity:

             

Common stock, $0.0001 par value, 400,000 shares authorized; 179,362 and 178,692 shares issued and outstanding at September 30, 2009, and December 31, 2008, respectively

    18     18  

Additional paid-in capital

    3,037,718     3,037,845  

Notes receivable from sale of common stock

    (680 )   (1,089 )

Net unrealized appreciation (depreciation)

    (1,883,617 )   (1,503,089 )

Undistributed earnings

    47,826     184,715  
           

Total shareholders' equity

   
1,201,265
   
1,718,400
 
           

Total liabilities and shareholders' equity

  $ 2,840,216   $ 3,722,186  
           

Net asset value per common share

  $ 6.70   $ 9.62  
           

The accompanying notes are an integral part of these consolidated financial statements.

F-196



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share amounts)

 
  For the Three
Months Ended
September 30,
  For the Nine
Months Ended
September 30,
 
 
  2009   2008   2009   2008  
 
  (unaudited)
  (unaudited)
 

Interest and Related Portfolio Income:

                         

Interest and dividends:

                         

Companies more than 25% owned

  $ 24,737   $ 29,699   $ 72,941   $ 85,167  

Companies 5% to 25% owned

    4,775     9,864     25,123     31,587  

Companies less than 5% owned

    36,118     72,644     131,953     249,325  
                   

Total interest and dividends

    65,630     112,207     230,017     366,079  
                   

Fees and other income:

                         

Companies more than 25% owned

    6,063     6,130     18,648     22,638  

Companies 5% to 25% owned

    13     342     223     411  

Companies less than 5% owned

    732     1,983     3,362     11,056  
                   

Total fees and other income

    6,808     8,455     22,233     34,105  
                   

Total interest and related portfolio income

    72,438     120,662     252,250     400,184  
                   

Expenses:

                         

Interest

    42,421     35,949     129,023     109,974  

Employee

    10,905     21,443     32,939     57,439  

Employee stock options

    392     1,477     2,369     9,531  

Administrative

    7,205     14,138     25,509     36,100  

Impairment of long-lived asset

            2,873      
                   

Total operating expenses

    60,923     73,007     192,713     213,044  
                   

Net investment income before income taxes

    11,515     47,655     59,537     187,140  

Income tax expense (benefit), including excise tax

    1,930     2,060     4,205     8,141  
                   

Net investment income

    9,585     45,595     55,332     178,999  
                   

Net Realized and Unrealized Gains (Losses):

                         

Net realized gains (losses):

                         

Companies more than 25% owned

    (12,681 )   1,098     (89,643 )   1,967  

Companies 5% to 25% owned

    (824 )   7,234     (54,963 )   (6,569 )

Companies less than 5% owned

    8,415     53,710     (13,649 )   51,932  
                   

Total net realized gains (losses)

    (5,090 )   62,042     (158,255 )   47,330  

Net change in unrealized appreciation or depreciation

    (27,681 )   (425,899 )   (380,528 )   (687,506 )
                   

Total net gains (losses)

    (32,771 )   (363,857 )   (538,783 )   (640,176 )

Gain on repurchase of debt

            83,532      

Loss on extinguishment of debt

    (117,497 )       (117,497 )    
                   

Net increase (decrease) in net assets resulting from operations

  $ (140,683 ) $ (318,262 ) $ (517,416 ) $ (461,177 )
                   

Basic earnings (loss) per common share

  $ (0.79 ) $ (1.78 ) $ (2.89 ) $ (2.70 )
                   

Diluted earnings (loss) per common share

  $ (0.79 ) $ (1.78 ) $ (2.89 ) $ (2.70 )
                   

Weighted average common shares outstanding—basic

    179,054     178,692     178,815     171,084  
                   

Weighted average common shares outstanding—diluted

    179,054     178,692     178,815     171,084  
                   

The accompanying notes are an integral part of these consolidated financial statements.

F-197



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(in thousands, except per share amounts)

 
  For the Nine Months
Ended September 30,
 
 
  2009   2008  
 
  (unaudited)
 

Operations:

             

Net investment income

  $ 55,332   $ 178,999  

Net realized gains (losses)

    (158,255 )   47,330  

Net change in unrealized appreciation (depreciation)

    (380,528 )   (687,506 )

Gain on repurchase of debt

    83,532      

Loss on extinguishment of debt

    (117,497 )    
           

Net increase (decrease) in net assets resulting from operations

    (517,416 )   (461,177 )
           

Shareholder distributions:

             

Common stock dividends

        (340,381 )
           

Net decrease in net assets resulting from shareholder distributions

        (340,381 )
           

Capital share transactions:

             

Sale of common stock

        402,478  

Issuance of common stock in lieu of cash distributions

        3,751  

Issuance of common stock upon exercise of stock options

    489      

Stock option expense

    2,438     9,655  

Net decrease in notes receivable from sale of common stock

    409     841  

Purchase of common stock held in deferred compensation trusts

        (943 )

Distribution of common stock held in deferred compensation trusts

        27,335  

Cancellation of stock options

    (3,055 )    
           

Net increase (decrease) in net assets resulting from capital share transactions

    280     443,117  
           

Total increase (decrease) in net assets

    (517,135 )   (358,441 )

Net assets at beginning of period

    1,718,400     2,771,847  
           

Net assets at end of period

  $ 1,201,265   $ 2,413,406  
           

Net asset value per common share

  $ 6.70   $ 13.51  
           

Common shares outstanding at end of period

    179,362     178,692  
           

The accompanying notes are an integral part of these consolidated financial statements.

F-198



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

 
  For the Nine Months
Ended September 30,
 
 
  2009   2008  
 
  (unaudited)
   
 

Cash flows from operating activities:

             

Net increase (decrease) in net assets resulting from operations

  $ (517,416 ) $ (461,177 )

Adjustments:

             

Portfolio investments

    (118,095 )   (1,019,750 )

Principal collections related to investment repayments or sales

    479,815     878,229  

Collections of notes and other consideration received from sale of investments

    171,030     16,316  

Realized gains from the receipt of notes and other consideration from sale of investments

    (577 )   (1,886 )

Realized losses

    194,152     87,867  

Gain on repurchase of debt

    (83,532 )    

Redemption of (investments in) money market and other securities

    (89,733 )   187,838  

Payment-in-kind interest and dividends, net of cash collections

    (24,352 )   (35,947 )

Change in accrued interest and dividends

    4,577     835  

Net collection (amortization) of discounts and fees

    (4,875 )   (10,176 )

Stock option expense

    2,438     9,655  

Impairment of long-lived asset

    2,873      

Changes in other assets and liabilities

    (95,823 )   (42,537 )

Depreciation and amortization

    1,169     1,752  

Net change in unrealized (appreciation) or depreciation

    380,528     687,506  
           

Net cash provided by (used in) operating activities

    302,179     298,525  
           

Cash flows from financing activities:

             

Sale of common stock

        402,478  

Sale of common stock upon the exercise of stock options

    489      

Collections of notes receivable from sale of common stock

    408     841  

Borrowings under notes payable

        193,000  

Repurchase or repayment of notes payable

    (224,357 )   (153,000 )

Net borrowings under (repayments on) revolver/bank term debt

        (197,250 )

Purchase of common stock held in deferred compensation trusts

        (943 )

Net change in restricted cash

    (659 )    

Deferred financing costs

    (65,725 )   (8,611 )

Other financing activities

        (35 )

Common stock dividends and distributions paid

        (336,630 )
           

Net cash provided by (used in) financing activities

    (289,844 )   (100,150 )
           

Net increase (decrease) in cash

    12,335     198,375  

Cash at beginning of period

    50,402     3,540  
           

Cash at end of period

  $ 62,737   $ 201,915  
           

The accompanying notes are an integral part of these consolidated financial statements.

F-199



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS

September 30, 2009 (unaudited)

(in thousands, except number of shares)

Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Companies More Than 25% Owned

                       

AGILE Fund I, LLC(5)

  Equity Interests         $ 665   $ 417  

    (Private Equity Fund)

                       
                     

  Total Investment           665     417  
                     

AllBridge Financial, LLC

  Senior Loan (6.6%, Due 12/09)   $ 1,311     1,311     1,311  

    (Asset Management)

  Equity Interests           40,118     15,523  
                     

  Total Investment           41,429     16,834  
                     

Allied Capital Senior Debt Fund, L.P.(5)

  Limited Partnership Interests           31,800     33,044  

    (Private Debt Fund)

                       
                     

  Total Investment           31,800     33,044  
                     

Avborne, Inc.(7)

  Preferred Stock (12,500 shares)               904  

    (Business Services)

  Common Stock (27,500 shares)                
                     

  Total Investment               904  
                     

Avborne Heavy Maintenance, Inc.(7)

  Common Stock (2,750 shares)                

    (Business Services)

                       
                     

  Total Investment                
                     

Aviation Properties Corporation

  Common Stock (100 shares)           93      

    (Business Services)

                       
                     

  Total Investment           93      
                     

Border Foods, Inc. 

  Senior Loan (12.9%, Due 3/12)     34,876     29,495     34,876  

    (Consumer Products)

  Preferred Stock (100,000 shares)           12,721     16,585  

  Common Stock (260,467 shares)           3,847      
                     

  Total Investment           46,063     51,461  
                     

Calder Capital Partners, LLC(5)

  Senior Loan (12.5%, Due 5/09)(6)     4,496     4,496     1,100  

    (Asset Management)

  Equity Interests           2,453      
                     

  Total Investment           6,949     1,100  
                     

Callidus Capital Corporation

  Subordinated Debt (18.0%, Due 8/13)     20,939     20,939     15,165  

    (Asset Management)

  Common Stock (100 shares)                
                     

  Total Investment           20,939     15,165  
                     

  Guaranty ($3,189)                    

Ciena Capital LLC

  Senior Loan (5.5%, Due 3/09)(6)     319,031     319,031     102,232  

    (Financial Services)

  Class B Equity Interests           119,436      

  Class C Equity Interests           109,097      
                     

  Total Investment           547,564     102,232  
                     

  Guaranty ($5,000—See Note 3)                    

CitiPostal Inc. 

  Senior Loan (3.7%, Due 12/13)     692     683     683  

     (Business Services)

  Unitranche Debt (12.0%, Due 12/13)     51,180     51,001     51,001  

  Subordinated Debt (16.0%, Due 12/15)     10,265     10,265     10,265  

  Common Stock (37,024 shares)           12,726     1,124  
                     

  Total Investment           74,675     63,073  
                     

F-200


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Coverall North America, Inc. 

  Unitranche Debt (12.0%, Due 7/11)   $ 31,627   $ 31,565   $ 31,565  

     (Business Services)

  Subordinated Debt (15.0%, Due 7/11)     5,563     5,553     5,553  

  Common Stock (763,333 shares)           14,362     21,261  
                     

  Total Investment           51,480     58,379  
                     

CR Holding, Inc. 

  Subordinated Debt (16.6%, Due 2/13)(6)     40,623     40,510     10,271  

     (Consumer Products)

  Common Stock (32,090,696 shares)           28,744      
                     

  Total Investment           69,254     10,271  
                     

Crescent Equity Corp.(8)

  Senior Loan (10.0%, Due 6/10)     433     433     433  

     (Business Services)

  Subordinated Debt (11.0%, Due 9/11 - 6/17)(6)     32,202     32,112     4,203  

  Common Stock (174 shares)           82,730      
                     

  Total Investment           115,275     4,636  
                     

  Guaranty ($900)                    

Direct Capital Corporation

  Senior Loan (8.0%, Due 1/14)(6)     8,175     8,175     8,573  

     (Financial Services)

  Subordinated Debt (16.0%, Due 3/13)(6)     55,671     55,496     7,139  

  Common Stock (2,317,020 shares)           25,732      
                     

  Total Investment           89,403     15,712  
                     

Financial Pacific Company

  Subordinated Debt (17.4%, Due 2/12 - 8/12)     68,967     68,870     41,417  

     (Financial Services)

  Preferred Stock (9,458 shares)           8,865      

  Common Stock (12,711 shares)           12,783      
                     

  Total Investment           90,518     41,417  
                     

Hot Light Brands, Inc. 

  Senior Loan (9.0%, Due 2/11)(6)     30,572     30,572     10,471  

     (Retail)

  Common Stock (93,500 shares)           5,151      
                     

  Total Investment           35,723     10,471  
                     

Hot Stuff Foods, LLC

  Senior Loan (3.7%, Due 2/11 - 2/12)     45,417     45,310     45,417  

     (Consumer Products)

  Subordinated Debt (12.3%, Due 8/12 - 2/13)(6)     83,692     83,387     49,801  

  Common Stock (1,147,453 shares)           56,187      
                     

  Total Investment           184,884     95,218  
                     

Huddle House, Inc. 

  Subordinated Debt (15.0%, Due 12/15)     19,544     19,494     19,494  

     (Retail)

  Common Stock (358,428 shares)           36,348     7,651  
                     

  Total Investment           55,842     27,145  
                     

IAT Equity, LLC and Affiliates

  Subordinated Debt (9.0%, Due 6/14)     6,000     6,000     6,000  

     d/b/a Industrial Air Tool
(Industrial Products)

  Equity Interests           7,500     9,948  
                     

  Total Investment           13,500     15,948  
                     

Impact Innovations Group, LLC

  Equity Interests in Affiliate               322  

     (Business Services)

                       
                     

  Total Investment               322  
                     

Insight Pharmaceuticals Corporation

  Subordinated Debt (15.0%, Due 9/12)     54,167     54,100     52,098  

     (Consumer Products)

  Common Stock (155,000 shares)           40,413     10,419  
                     

  Total Investment           94,513     62,517  
                     

Jakel, Inc. 

  Subordinated Debt (15.5%, Due 3/08)(6)     748     748     374  
                     

     (Industrial Products)

  Total Investment           748     374  
                     

Knightsbridge CLO 2007-1 Ltd.(4)

  Class E Notes (9.5%, Due 1/22)     18,700     18,700     11,160  

    (CLO)

  Income Notes (13.3%)(11)           38,746     22,640  
                     

  Total Investment           57,446     33,800  
                     

F-201


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Knightsbridge CLO 2008-1 Ltd.(4)

  Class C Notes (7.8%, Due 6/18)   $ 12,800   $ 12,800   $ 12,246  

    (CLO)

  Class D Notes (8.8%, Due 6/18)     8,000     8,000     7,080  

  Class E Notes (5.3%, Due 6/18)     13,200     11,081     9,798  

  Income Notes (21.2%)(11)           21,327     20,112  
                     

  Total Investment           53,208     49,236  
                     

MVL Group, Inc. 

  Senior Loan (12.0%, Due 7/12)     25,260     25,256     25,256  

    (Business Services)

  Subordinated Debt (14.5%, Due 7/12)     41,434     41,402     36,021  

  Subordinated Debt (8.0%, Due 7/12)(6)     144     139      

  Common Stock (560,716 shares)           555      
                     

  Total Investment           67,352     61,277  
                     

Penn Detroit Diesel Allison, LLC

  Equity Interests           20,081     13,870  
                     

    (Business Services)

  Total Investment           20,081     13,870  
                     

Senior Secured Loan Fund LLC

  Subordinated Certificates (8.4%)           165,248     165,000  

     (Private Debt Fund)

  Equity Interests           1      
                     

  Total Investment           165,249     165,000  
                     

Service Champ, Inc. 

  Subordinated Debt (15.5%, Due 4/12)     27,566     27,515     27,515  

     (Business Services)

  Common Stock (55,112 shares)           11,785     28,321  
                     

  Total Investment           39,300     55,836  
                     

Stag-Parkway, Inc. 

  Subordinated Debt (10.0%, Due 7/12)     19,044     19,000     19,000  

     (Business Services)

  Common Stock (25,000 shares)           32,686     7,359  
                     

  Total Investment           51,686     26,359  
                     

Startec Equity, LLC

  Equity Interests           211      

     (Telecommunications)

                       
                     

  Total Investment           211      
                     

     Total companies more than 25% owned

            $ 2,025,850   $ 1,032,018  
                     

Companies 5% to 25% Owned

                       

10th Street, LLC

  Subordinated Debt (13.0%, Due 11/14)     22,100     22,004     22,100  

     (Business Services)

  Equity Interests           422     485  

  Option           25     25  
                     

  Total Investment           22,451     22,610  
                     

Air Medical Group Holdings LLC

  Senior Loan (4.3%, Due 3/11)     4,665     4,642     4,456  

     (Healthcare Services)

  Equity Interests           2,993     20,000  
                     

  Total Investment           7,635     24,456  
                     

BB&T Capital Partners/Windsor

                       

Mezzanine Fund, LLC(5)

  Equity Interests           11,789     10,009  

    (Private Equity Fund)

                       
                     

  Total Investment           11,789     10,009  
                     

Driven Brands, Inc. 

  Subordinated Debt (16.6%, Due 7/15)     89,838     89,477     86,398  

    (Consumer Services)

  Common Stock (3,772,098 shares)           9,516     2,500  
                     

  Total Investment           98,993     88,898  
                     

Multi-Ad Services, Inc. 

  Unitranche Debt (11.3%, Due 11/11)     2,508     2,491     2,488  

    (Business Services)

  Equity Interests           1,737     1,206  
                     

  Total Investment           4,228     3,694  
                     

Pendum Acquisition, Inc. 

  Common Stock (8,872 shares)                

    (Business Services)

                       
                     

  Total Investment                
                     

F-202


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Postle Aluminum Company, LLC

  Senior Loan (6.0%, Due 10/12)(6)   $ 35,000   $ 34,876   $ 15,308  

    (Industrial Products)

  Subordinated Debt (3.0%, Due 10/12)(6)     23,953     23,868      

  Equity Interests           2,174      
                     

  Total Investment           60,918     15,308  
                     

Progressive International

  Preferred Stock (500 shares)           500     5,847  

    Corporation

  Common Stock (197 shares)           13     153  

    (Consumer Products)

  Warrants                
                     

  Total Investment           513     6,000  
                     

Regency Healthcare Group, LLC

  Equity Interests           1,302     1,841  
                     

    (Healthcare Services)

                       

  Total Investment           1,302     1,841  
                     

SGT India Private Limited(4)

  Common Stock (150,596 shares)           4,158      

    (Business Services)

                       
                     

  Total Investment           4,158      
                     

Soteria Imaging Services, LLC

  Subordinated Debt (11.3%, Due 11/10)     4,250     4,204     4,154  

    (Healthcare Services)

  Equity Interests           1,881     1,283  
                     

  Total Investment           6,085     5,437  
                     

Universal Environmental Services, LLC

  Equity Interests           1,599      

    (Business Services)

                       
                     

  Total Investment           1,599      
                     

Total companies 5% to 25% owned

              219,671     178,253  
                     

Companies Less Than 5% Owned

                       

3SI Security Systems, Inc. 

  Subordinated Debt (16.6%, Due 8/13)(6)     29,548     29,473     14,865  

    (Consumer Products)

                       
                     

  Total Investment           29,473     14,865  
                     

Augusta Sportswear Group, Inc. 

  Common Stock (2,500 shares)           2,500     1,523  

    (Consumer Products)

                       
                     

  Total Investment           2,500     1,523  
                     

Axium Healthcare Pharmacy, Inc. 

  Subordinated Debt (8.0%, Due 3/15)     2,975     2,975     2,380  

     (Healthcare Services)

                       
                     

  Total Investment           2,975     2,380  
                     

BenefitMall Holdings Inc. 

  Subordinated Debt (18.0%, Due 6/14)     40,326     40,250     40,250  

     (Business Services)

  Common Stock (39,274,290 shares)(12)           39,274     73,729  

  Warrants(12)                
                     

  Total Investment           79,524     113,979  
                     

Broadcast Electronics, Inc. 

  Senior Loan (8.8%, Due 11/11)(6)     4,875     4,847     340  

     (Business Services)

  Preferred Stock (2,044 shares)                
                     

  Total Investment           4,847     340  
                     

Bushnell, Inc. 

  Subordinated Debt (6.8%, Due 2/14)     41,325     40,161     30,204  

     (Consumer Products)

                       
                     

  Total Investment           40,161     30,204  
                     

Callidus Debt Partners

  Class C Notes (12.9%, Due 12/13)(6)     19,420     19,527     2,935  

     CDO Fund I, Ltd.(4)(10)

  Class D Notes (17.0%, Due 12/13)(6)     9,400     9,454      

     (CDO)

                       
                     

  Total Investment           28,981     2,935  
                     

F-203


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Callidus Debt Partners

  Preferred Shares (23,600,000 shares)         $ 20,138   $ 2,199  

     CLO Fund III, Ltd.(4)(10)
(CLO)

                       
                     

  Total Investment           20,138     2,199  
                     

Callidus Debt Partners

  Class D Notes (5.1%, Due 4/20)   $ 3,000     2,160     1,653  

     CLO Fund IV, Ltd.(4)(10)
(CLO)

  Income Notes (0.0%)(11)           14,868     4,366  
                     

  Total Investment           17,028     6,019  
                     

Callidus Debt Partners

  Income Notes (2.6%)(11)           13,521     4,625  
                     

     CLO Fund V, Ltd.(4)(10)
(CLO)

                       

  Total Investment           13,521     4,625  
                     

Callidus Debt Partners

  Class D Notes (6.5%, Due 10/21)     9,325     7,602     3,833  

     CLO Fund VI, Ltd.(4)(10)
(CLO)

  Income Notes (0.0%)(11)           29,144     4,155  
                     

  Total Investment           36,746     7,988  
                     

Callidus Debt Partners

  Income Notes (0.0%)(11)           24,824     5,431  

     CLO Fund VII, Ltd.(4)(10)
(CLO)

                       
                     

  Total Investment           24,824     5,431  
                     

Callidus MAPS CLO Fund I LLC(10)
(CLO)

  Class E Notes (5.8%, Due 12/17)
Income Notes (0.0%)(11)
    17,000     17,000
41,176
    11,400
13,662
 
                     

  Total Investment           58,176     25,062  
                     

Callidus MAPS CLO Fund II, Ltd.(4)(10)
(CLO)

  Class D Notes (4.8%, Due 7/22)
Income Notes (0.9%)(11)
    7,700     3,785
18,109
    3,068
4,819
 
                     

  Total Investment           21,894     7,887  
                     

Carlisle Wide Plank Floors, Inc.
(Consumer Products)

  Unitranche Debt (12.0%, Due 6/11)
Common Stock (345,056 Shares)
    1,644     1,637
345
    1,533
 
                     

  Total Investment           1,982     1,533  
                     

Catterton Partners VI, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           3,287     1,789  
                     

  Total Investment           3,287     1,789  
                     

Commercial Credit Group, Inc.
(Financial Services)

  Subordinated Debt (15.0%, Due 6/15)
Preferred Stock (64,679 shares)
Warrants
    22,000     21,970
15,543
    21,970
6,212
 
                     

  Total Investment           37,513     28,182  
                     

Community Education Centers, Inc.
(Education Services)

  Subordinated Debt (19.5%, Due 11/13)     36,654     36,602     36,501  
                     

  Total Investment           36,602     36,501  
                     

Component Hardware Group, Inc.
(Industrial Products)

  Subordinated Debt (13.5%, Due 1/13)     18,921     18,876     16,587  
                     

  Total Investment           18,876     16,587  
                     

Cook Inlet Alternative Risk, LLC
(Business Services)

  Unitranche Debt (10.8%, Due 4/13)
Equity Interests
    87,600     87,286
552
    69,000
 
                     

  Total Investment           87,838     69,000  
                     

F-204


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Cortec Group Fund IV, L.P.(5)
(Private Equity)

  Limited Partnership Interest         $ 6,572   $ 3,812  
                     

  Total Investment           6,572     3,812  
                     

Digital VideoStream, LLC
(Business Services)

  Unitranche Debt (11.0%, Due 2/12)
Convertible Subordinated Debt (10.0%, Due 2/16)
  $
13,203
4,894
    13,155
4,883
    12,825
4,883
 
                     

  Total Investment           18,038     17,708  
                     

DirectBuy Holdings, Inc.
(Consumer Products)

  Subordinated Debt (16.0%, Due 5/13)
Equity Interests
    76,389     76,139
8,000
    60,287
 
                     

  Total Investment           84,139     60,287  
                     

Distant Lands Trading Co.
(Consumer Products)

  Senior Loan (6.3%, Due 11/11)
Unitranche Debt (11.0%, Due 11/11)
Common Stock (3,451 shares)
    6,800
43,581
    6,781
43,499
3,451
    6,358
41,967
1,147
 
                     

  Total Investment           53,731     49,472  
                     

Diversified Mercury
Communications, LLC
(Business Services)

  Senior Loan (4.5%, Due 3/13)     2,814     2,803     2,525  
                     

  Total Investment           2,803     2,525  
                     

Dryden XVIII Leveraged
Loan 2007 Limited(4)
(CLO)

  Class B Notes (5.0%, Due 10/19)(6)
Income Notes (0.0%)(11)
    9,092     7,872
23,164
    2,355
2,415
 
                     

  Total Investment           31,036     4,770  
                     

Dynamic India Fund IV(4)(5)
(Private Equity Fund)

  Equity Interests           9,350     7,982  
                     

  Total Investment           9,350     7,982  
                     

EarthColor, Inc.
(Business Services)

  Subordinated Debt (15.0%, Due 11/13)(6)
Common Stock (63,438 shares)(12)
Warrants(12)
    123,819     123,385
63,438
   
 
                     

  Total Investment           186,823      
                     

eCentury Capital Partners, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           7,274      
                     

  Total Investment           7,274      
                     

eInstruction Corporation
(Education Services)

  Subordinated Debt (12.1%, Due 7/14-1/15)
Common Stock (2,406 shares)
    36,069     35,951
2,500
    32,708
750
 
                     

  Total Investment           38,451     33,458  
                     

Farley's & Sathers Candy Company, Inc.
(Consumer Products)

  Subordinated Debt (8.3%, Due 3/11)     2,500     2,496     2,492  
                     

  Total Investment           2,496     2,492  
                     

Fidus Mezzanine Capital, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           12,828     7,804  
                     

  Total Investment           12,828     7,804  
                     

Freedom Financial Network, LLC
(Financial Services)

  Subordinated Debt (13.5%, Due 2/14)     6,000     5,953     6,000  
                     

  Total Investment           5,953     6,000  
                     

                       

F-205


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Geotrace Technologies, Inc.
(Energy Services)

  Warrants         $ 2,027   $ 2,300  
                     

  Total Investment           2,027     2,300  
                     

Gilchrist & Soames, Inc.
(Consumer Products)

  Subordinated Debt (13.4%, Due 10/13)   $ 25,304     25,186     23,101  
                     

  Total Investment           25,186     23,101  
                     

Havco Wood Products LLC
(Industrial Products)

  Equity Interests           910      
                     

  Total Investment           910      
                     

Higginbotham Insurance Agency, Inc.
(Business Services)

  Subordinated Debt (13.7%, Due 8/13 - 8/14)
Common Stock (23,695 shares)(12)
Warrant(12)
    53,305     53,129
23,695
    53,129
12,355
 
                     

  Total Investment           76,824     65,484  
                     

The Homax Group, Inc.
(Consumer Products)

  Senior Loan (6.3%, Due 10/12)
Subordinated Debt (14.5%, Due 4/14)
Preferred Stock (76 shares)
Common Stock (24 shares)
Warrants
    10,116
14,159
    10,072
13,619
76
5
954
    9,168
4,945


 
                     

  Total Investment           24,726     14,113  
                     

Ideal Snacks Corporation
(Consumer Products)

  Senior Loan (8.5%, Due 6/10)     1,084     1,084     1,068  
                     

  Total Investment           1,084     1,068  
                     

Kodiak Fund LP(5)
(Private Equity Fund)

  Equity Interests           9,332     900  
                     

  Total Investment           9,332     900  
                     

Market Track Holdings, LLC
(Business Services)

  Senior Loan (8.0%, Due 6/14)
Subordinated Debt (15.9%, Due 6/14)
    2,500
24,600
    2,450
24,504
    2,392
23,166
 
                     

  Total Investment           26,954     25,558  
                     

NetShape Technologies, Inc.
(Industrial Products)

  Senior Loan (4.0%, Due 2/13)     875     875     368  
                     

  Total Investment           875     368  
                     

Network Hardware Resale, Inc.
(Business Services)

  Unitranche Debt (12.8%, Due 12/11)
Convertible Subordinated Debt
(9.8%, Due 12/15)
    16,330
15,953
    16,382
16,000
    16,330
16,000
 
                     

  Total Investment           32,382     32,330  
                     

Novak Biddle Venture Partners III, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           2,018     1,037  
                     

  Total Investment           2,018     1,037  
                     

Oahu Waste Services, Inc.
(Business Services)

  Stock Appreciation Rights           206     406  
                     

  Total Investment           206     406  
                     

Pangaea CLO 2007-1 Ltd.(4)
(CLO)

  Class D Notes (5.3%, Due 1/21)     15,000     11,985     7,795  
                     

  Total Investment           11,985     7,795  
                     

                       

F-206


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

PC Helps Support, LLC
(Business Services)

  Senior Loan (4.3%, Due 12/13)
Subordinated Debt (12.8%, Due 12/13)
  $
8,299
27,121
  $
8,210
27,013
  $
7,763
25,572
 
                     

  Total Investment           35,223     33,335  
                     

Performant Financial Corporation
(Business Services)

  Common Stock (478,816 shares)           734     920  
                     

  Total Investment           734     920  
                     

Promo Works, LLC
(Business Services)

  Unitranche Debt (12.3%, Due 12/11)     23,111     22,994     20,312  
                     

  Total Investment           22,994     20,312  
                     

Reed Group, Ltd.
(Healthcare Services)

  Senior Loan (6.4%, Due 12/13)
Subordinated Debt (15.8%, Due 12/13)
Equity Interests
    12,060
19,076
    11,929
19,013
1,800
    9,530
14,924
 
                     

  Total Investment           32,742     24,454  
                     

S.B. Restaurant Company
(Retail)

  Unitranche Debt (9.8%, Due 4/11)
Preferred Stock (46,690 shares)
Warrants
    38,327     38,184
117
534
    33,606

 
                     

  Total Investment           38,835     33,606  
                     

SPP Mezzanine Funding II, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           7,605     6,987  
                     

  Total Investment           7,605     6,987  
                     

STS Operating, Inc.
(Industrial Products)

  Subordinated Debt (11.0%, Due 1/13)     30,386     30,313     27,305  
                     

  Total Investment           30,313     27,305  
                     

Summit Energy Services, Inc.
(Business Services)

  Common Stock (415,982 shares)           1,861     2,150  
                     

  Total Investment           1,861     2,150  
                     

Tappan Wire & Cable Inc.
(Business Services)

  Unitranche Debt (15.0%, Due 8/14)(6)
Common Stock (12,940 shares)(12)
Warrant(12)
    22,346     22,248
2,043
    4,515

 
                     

  Total Investment           24,291     4,515  
                     

The Step2 Company, LLC
(Consumer Products)

  Unitranche Debt (11.0%, Due 4/12)
Equity Interests
    94,602     94,396
2,156
    89,550
1,528
 
                     

  Total Investment           96,552     91,078  
                     

Tradesmen International, Inc.
(Business Services)

  Subordinated Debt (12.0%, Due 12/12)     40,000     39,793     18,347  
                     

  Total Investment           39,793     18,347  
                     

TransAmerican Auto Parts, LLC
(Consumer Products)

  Subordinated Debt (18.3%, Due 11/12)(6)
Equity Interests
    24,561     24,409
1,033
   
 
                     

  Total Investment           25,442      
                     

Trover Solutions, Inc.
(Business Services)

  Subordinated Debt (12.0%, Due 11/12)     56,676     56,510     52,568  
                     

  Total Investment           56,510     52,568  
                     

United Road Towing, Inc.
(Consumer Services)

  Subordinated Debt (11.8%, Due 1/14)     19,060     18,988     18,792  
                     

  Total Investment           18,988     18,792  
                     

                       

F-207


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Venturehouse-Cibernet Investors, LLC
(Business Services)

  Equity Interest         $   $  
                     

  Total Investment                
                     

WMA Equity Corporation and Affiliates
d/b/a Wear Me Apparel
(Consumer Products)

  Subordinated Debt (16.8%, Due 4/13-4/14)(6)
Common Stock (86 shares)
  $ 139,455     138,559

39,549
    71,345

 
                     

  Total Investment           178,108     71,345  
                     

Webster Capital II, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           1,338     809  
                     

  Total Investment           1,338     809  
                     

Woodstream Corporation
(Consumer Products)

  Subordinated Debt (12.0%, Due 2/15)
Common Stock (6,960 shares)
    90,000     89,678
6,961
    74,221
2,000
 
                     

  Total Investment           96,639     76,221  
                     

Other companies

  Other debt investments
Other equity investments
    37     (151
41
)
  (151
8
)
                     

  Total Investment           (110 )   (143 )
                     

Total companies less than 5% owned

        $ 1,948,748   $ 1,232,400  
                     

Total private finance (113 portfolio investments)

        $ 4,194,269   $ 2,442,671  
                     

Commercial Real Estate Finance
(in thousands, except number of loans)

 
   
   
  September 30, 2009
(unaudited)

 
 
  Stated Interest
Rate Ranges
  Number of
Loans
  Cost   Value  

Commercial Mortgage Loans

                       

  Up to 6.99%     3   $ 32,143   $ 31,006  

  7.00%–8.99%     2     1,876     1,864  

  9.00%–10.99%     1     6,476     6,476  

  11.00%–12.99%     1     10,479     6,319  

  15.00% and above     2     3,970     4,848  
                     

Total commercial mortgage loans(13)

            $ 54,944   $ 50,513  
                     

Real Estate Owned

            $ 5,937   $ 6,179  
                     

Equity Interests(2)—Companies more than 25% owned

            $ 13,185   $ 11,831  
                     

Total commercial real estate finance

            $ 74,066   $ 68,523  
                     

Total portfolio

            $ 4,268,335   $ 2,511,194  
                     

 

 
  Yield   Cost   Value  

Investments in Money Market and Other Securities

                   

First American Treasury Obligations Fund

      $ 90,020   $ 90,020  
                 

Total

        $ 90,020   $ 90,020  
                 

The accompanying notes are an integral part of these consolidated financial statements.

F-208



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS

December 31, 2008

(in thousands, except number of shares)

Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Companies More Than 25% Owned

                       

AGILE Fund I, LLC(5)
(Private Equity Fund)

  Equity Interests         $ 694   $ 497  
                     

  Total Investment           694     497  
                     

AllBridge Financial, LLC
(Asset Management)

  Equity Interests           33,294     10,960  
                     

  Total Investment           33,294     10,960  
                     

  Standby Letter of Credit ($15,000)                    

Allied Capital Senior Debt Fund, L.P.(5)
(Private Debt Fund)

  Limited Partnership Interests           31,800     31,800  
                     

  Total Investment           31,800     31,800  
                     

Avborne, Inc.(7)

  Preferred Stock (12,500 shares)               942  

    (Business Services)

  Common Stock (27,500 shares)                
                     

  Total Investment               942  
                     

Avborne Heavy Maintenance, Inc.(7)
(Business Services)

  Common Stock (2,750 shares)                
                     

  Total Investment                
                     

Aviation Properties Corporation
(Business Services)

  Common Stock (100 shares)           93      
                     

  Total Investment           93      
                     

  Standby Letters of Credit ($1,000)                    

Border Foods, Inc. 

  Senior Loan (12.6%, Due 12/09 - 3/12)   $ 33,027     26,860     33,027  

    (Consumer Products)

  Preferred Stock (100,000 shares)           12,721     11,851  

  Common Stock (260,467 shares)           3,847      
                     

  Total Investment           43,428     44,878  
                     

Calder Capital Partners, LLC(5)

  Senior Loan (10.5%, Due 5/09)(6)     4,496     4,496     953  

    (Asset Management)

  Equity Interests           2,453      
                     

  Total Investment           6,949     953  
                     

Callidus Capital Corporation

  Subordinated Debt (18.0%, Due 8/13 - 2/14)     16,068     16,068     16,068  

    (Asset Management)

  Common Stock (100 shares)               34,377  
                     

  Total Investment           16,068     50,445  
                     

  Guaranty ($6,447)                    

Ciena Capital LLC

  Senior Loan (5.5%, Due 3/09)(6)     319,031     319,031     104,883  

    (Financial Services)

  Class B Equity Interests           119,436      

  Class C Equity Interests           109,301      
                     

  Total Investment           547,768     104,883  
                     

  Guaranty ($5,000—See Note 3)                    

  Standby Letters of Credit ($102,600—See Note 3)                    

CitiPostal Inc. 

  Senior Loan (4.0%, Due 12/13)     692     681     681  

    (Business Services)

  Unitranche Debt (12.0%, Due 12/13)     51,758     51,548     51,548  

  Subordinated Debt (16.0%, Due 12/15)     9,114     9,114     9,114  

  Common Stock (37,024 shares)           12,726     8,616  
                     

  Total Investment           74,069     69,959  
                     

F-209


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Coverall North America, Inc. 

  Unitranche Debt (12.0%, Due 7/11)   $ 32,035   $ 31,948   $ 31,948  

    (Business Services)

  Subordinated Debt (15.0%, Due 7/11)     5,563     5,549     5,549  

  Common Stock (763,333 shares)           14,361     17,968  
                     

  Total Investment           51,858     55,465  
                     

CR Holding, Inc. 

  Subordinated Debt (16.6%, Due 2/13)(6)     39,307     39,193     17,360  

    (Consumer Products)

  Common Stock (32,090,696 shares)           28,744      
                     

  Total Investment           67,937     17,360  
                     

Crescent Equity Corp.(8)

  Senior Loan (10.0%, Due 1/09)     433     433     433  

    (Business Services)

  Subordinated Debt (11.0%, Due 9/11 - 6/17)     22,312     22,247     14,283  

  Subordinated Debt (11.0%, Due 1/12 - 9/12)(6)     10,097     10,072     4,331  

  Common Stock (174 shares)           81,255     4,580  
                     

  Total Investment           114,007     23,627  
                     

  Guaranty ($900)                    

  Standby Letters of Credit ($200)                    

Direct Capital Corporation

  Subordinated Debt (16.0%, Due 3/13)(6)     55,671     55,496     13,530  

    (Financial Services)

  Common Stock (2,317,020 shares)           25,732      
                     

  Total Investment           81,228     13,530  
                     

Financial Pacific Company

  Subordinated Debt (17.4%, Due 2/12 - 8/12)     68,967     68,840     62,189  

    (Financial Services)

  Preferred Stock (9,458 shares)           8,865      

  Common Stock (12,711 shares)           12,783      
                     

  Total Investment           90,488     62,189  
                     

ForeSite Towers, LLC
(Tower Leasing)

  Equity Interest               889  
                     

  Total Investment               889  
                     

Global Communications, LLC
(Business Services)

  Senior Loan (10.0%, Due 9/02)(6)     1,335     1,335     1,335  
                     

  Total Investment           1,335     1,335  
                     

Hot Light Brands, Inc. 

  Senior Loan (9.0%, Due 2/11)(6)     30,522     30,522     13,678  

    (Retail)

  Common Stock (93,500 shares)           5,151      
                     

  Total Investment           35,673     13,678  
                     

  Standby Letter of Credit ($105)                    

Hot Stuff Foods, LLC

  Senior Loan (4.0%, Due 2/11 - 2/12)     53,597     53,456     42,378  

    (Consumer Products)

  Subordinated Debt (12.4%, Due 8/12 - 2/13)(6)     83,692     83,387      

  Common Stock (1,147,453 shares)           56,187      
                     

  Total Investment           193,030     42,378  
                     

Huddle House, Inc. 

  Subordinated Debt (15.0%, Due 12/12)     57,244     57,067     57,067  

    (Retail)

  Common Stock (358,428 shares)           35,828     20,922  
                     

  Total Investment           92,895     77,989  
                     

IAT Equity, LLC and Affiliates
d/b/a Industrial Air Tool
(Industrial Products)

 
Subordinated Debt (9.0%, Due 6/14)
Equity Interests
   
6,000
   
6,000
7,500
   
6,000
8,860
 
                     

  Total Investment           13,500     14,860  
                     

Impact Innovations Group, LLC
(Business Services)

  Equity Interests in Affiliate               321  
                     

  Total Investment               321  
                     

Insight Pharmaceuticals Corporation

  Subordinated Debt (15.0%, Due 9/12)     45,827     45,738     45,827  

    (Consumer Products)

  Subordinated Debt (19.0%, Due 9/12)(6)     16,177     16,126     17,532  

  Preferred Stock (25,000 shares)           25,000     4,068  

F-210


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

  Common Stock (620,000 shares)         $ 6,325      
                     

  Total Investment           93,189   $ 67,427  
                     

Jakel, Inc.
(Industrial Products)

  Subordinated Debt (15.5%, Due 3/08)(6)   $ 748     748     374  
                     

  Total Investment           748     374  
                     

Knightsbridge CLO 2007-1 Ltd.(4)

  Class E Notes (13.8%, Due 1/22)     18,700     18,700     14,866  

    (CLO)

  Income Notes (14.9%)(11)           40,914     35,214  
                     

  Total Investment           59,614     50,080  
                     

Knightsbridge CLO 2008-1 Ltd.(4)

  Class C Notes (9.3%, Due 6/18)     12,800     12,800     12,800  

    (CLO)

  Class D Notes (10.3%, Due 6/18)     8,000     8,000     8,000  

  Class E Notes (6.8%, Due 6/18)     13,200     10,573     10,573  

  Income Notes (16.6%)(11)           21,315     21,315  
                     

  Total Investment           52,688     52,688  
                     

MHF Logistical Solutions, Inc.
(Business Services)

  Subordinated Debt (13.0%, Due 6/12 - 6/13)(6)     49,841     49,633      

    

  Preferred Stock (10,000 shares)                

  Common Stock (20,934 shares)           20,942      
                     

  Total Investment           70,575      
                     

MVL Group, Inc. 

  Senior Loan (12.0%, Due 6/09 - 7/09)     30,674     30,663     30,663  

    (Business Services)

  Subordinated Debt (14.5%, Due 6/09 - 7/09)     41,074     40,994     40,994  

  Subordinated Debt (3.0%, Due 6/09)(6)     144     139     86  

  Common Stock (560,716 shares)           555      
                     

  Total Investment           72,351     71,743  
                     

Old Orchard Brands, LLC

  Subordinated Debt (18.0%, Due 7/14)     18,951     18,882     18,882  

    (Consumer Products)

  Equity Interests           16,857     27,763  
                     

  Total Investment           35,739     46,645  
                     

Penn Detroit Diesel Allison, LLC

  Subordinated Debt (15.5%, Due 8/13)     37,984     37,869     37,869  

    (Business Services)

  Equity Interests           18,873     21,100  
                     

  Total Investment           56,742     58,969  
                     

Service Champ, Inc. 

  Subordinated Debt (15.5%, Due 4/12)     27,050     26,984     26,984  

    (Business Services)

  Common Stock (55,112 shares)           11,785     21,156  
                     

  Total Investment           38,769     48,140  
                     

Stag-Parkway, Inc. 

  Unitranche Debt (14.0%, Due 7/12)     17,975     17,920     17,962  

    (Business Services)

  Common Stock (25,000 shares)           32,686     6,968  
                     

  Total Investment           50,606     24,930  
                     

Startec Equity, LLC
(Telecommunications)

  Equity Interests           211     332  
                     

  Total Investment           211     332  
                     

Senior Secured Loan Fund LLC

  Subordinated Certificates (12.0)%           125,423     125,423  

    (Private Debt Fund)

  Equity Interests           1     1  
                     

  Total Investment           125,424     125,424  
                     

Worldwide Express Operations, LLC

  Subordinated Debt (14.0%, Due 2/14)(6)     2,865     2,722     2,032  

    (Business Services)

  Equity Interests           11,384      

  Warrants           144      
                     

  Total Investment           14,250     2,032  
                     

Total companies more than 25% owned

            $ 2,167,020   $ 1,187,722  
                     

Companies 5% to 25% Owned

                       

10th Street, LLC

  Subordinated Debt (13.0%, Due 11/14)     21,439     21,329     21,439  

F-211


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

    (Business Services)

  Equity Interests         $ 422   $ 975  

  Option           25     25  
                     

  Total Investment           21,776     22,439  
                     

Advantage Sales & Marketing, Inc. 

  Subordinated Debt (12.0%, Due 3/14)   $ 158,617     158,132     135,000  

    (Business Services)

  Equity Interests               5,000  
                     

  Total Investment           158,132     140,000  
                     

Air Medical Group Holdings LLC

  Senior Loan (3.3%, Due 3/11)     3,360     3,326     3,139  

    (Healthcare Services)

  Equity Interests           2,993     10,800  
                     

  Total Investment           6,319     13,939  
                     

Alpine ESP Holdings, Inc. 

  Preferred Stock (701 shares)           701      

    (Business Services)

  Common Stock (11,657 shares)           13      
                     

  Total Investment           714      
                     

Amerex Group, LLC

  Subordinated Debt (12.3%, Due 1/13)     8,789     8,784     8,784  

    (Consumer Products)

  Equity Interests           3,508     9,932  
                     

  Total Investment           12,292     18,716  
                     

BB&T Capital Partners/Windsor

                       

Mezzanine Fund, LLC(5)
(Private Equity Fund)

  Equity Interests           11,789     11,063  
                     

  Total Investment           11,789     11,063  
                     

Becker Underwood, Inc. 

  Subordinated Debt (14.5%, Due 8/12)     25,503     25,450     25,502  

    (Industrial Products)

  Common Stock (4,376 shares)           5,014     2,267  
                     

  Total Investment           30,464     27,769  
                     

Drew Foam Companies, Inc. 

  Preferred Stock (622,555 shares)           623     512  

    (Business Services)

  Common Stock (6,286 shares)           6      
                     

  Total Investment           629     512  
                     

Driven Brands, Inc. 

  Subordinated Debt (16.5%, Due 7/15)     84,106     83,698     83,698  

    (Consumer Services)

  Common Stock (3,772,098 shares)           9,516     4,855  
                     

  Total Investment           93,214     88,553  
                     

Hilden America, Inc.
(Consumer Products)

  Common Stock (19 shares)           454     76  
                     

  Total Investment           454     76  
                     

Lydall Transport, Ltd.
(Business Services)

  Equity Interests           432     345  
                     

  Total Investment           432     345  
                     

Multi-Ad Services, Inc. 

  Unitranche Debt (11.3%, Due 11/11)     3,018     2,995     2,941  

    (Business Services)

  Equity Interests           1,737     1,782  
                     

  Total Investment           4,732     4,723  
                     

Progressive International

                       

Corporation
(Consumer Products)

  Preferred Stock (500 shares)
Common Stock (197 shares)
Warrants
          500
13
    1,125
4,600
 
                     

  Total Investment           513     5,725  
                     

Regency Healthcare Group, LLC

  Unitranche Debt (11.1%, Due 6/12)     10,901     10,855     10,825  

    (Healthcare Services)

  Equity Interests           1,302     2,050  
                     

  Total Investment           12,157     12,875  
                     

SGT India Private Limited(4)
(Business Services)

  Common Stock (150,596 shares)           4,137      
                     

  Total Investment           4,137      
                     

F-212


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Soteria Imaging Services, LLC

  Subordinated Debt (11.3%, Due 11/10)   $ 4,250   $ 4,167   $ 4,054  

    (Healthcare Services)

  Equity Interests           1,881     1,971  
                     

  Total Investment           6,048     6,025  
                     

Triax Holdings, LLC

  Subordinated Debt (21.0%, Due 2/12)(6)     10,625     10,587      

    (Consumer Products)

  Equity Interests           16,528      
                     

  Total Investment           27,115      
                     

Universal Environmental Services, LLC
(Business Services)

  Equity Interests           1,599      
                     

  Total Investment           1,599      
                     

Total companies 5% to 25% owned

            $ 392,516   $ 352,760  
                     

Companies Less Than 5% Owned

                       

3SI Security Systems, Inc.
(Consumer Products)

  Subordinated Debt (14.6%, Due 8/13)   $ 29,200   $ 29,118   $ 28,170  
                     

  Total Investment           29,118     28,170  
                     

Abraxas Corporation
(Business Services)

  Subordinated Debt (14.6%, Due 4/13)     36,822     36,662     36,170  
                     

  Total Investment           36,662     36,170  
                     

Augusta Sportswear Group, Inc. 

  Subordinated Debt (13.0%, Due 1/15)     53,000     52,825     52,406  

    (Consumer Products)

  Common Stock (2,500 shares)           2,500     1,400  
                     

  Total Investment           55,325     53,806  
                     

Axium Healthcare Pharmacy, Inc. 

  Senior Loan (14.0%, Due 12/12)     3,750     3,724     3,654  

    (Healthcare Services)

  Unitranche Debt (14.0%, Due 12/12)     8,500     8,471     7,908  

  Common Stock (22,860 shares)           2,286     100  
                     

  Total Investment           14,481     11,662  
                     

Baird Capital Partners IV Limited(5)
(Private Equity Fund)

  Limited Partnership Interest           3,636     2,978  
                     

  Total Investment           3,636     2,978  
                     

BenefitMall Holdings Inc. 

  Subordinated Debt (18.0%, Due 6/14)     40,326     40,238     40,238  

    (Business Services)

  Common Stock (39,274,290 shares)(12)           39,274     91,149  

  Warrants(12)                
                     

  Total Investment           79,512     131,387  
                     

Broadcast Electronics, Inc. 

  Senior Loan (8.8%, Due 11/11)(6)     4,912     4,884     773  

    (Business Services)

  Preferred Stock (2,044 shares)                
                     

  Total Investment           4,884     773  
                     

Bushnell, Inc.
(Consumer Products)

  Subordinated Debt (8.0%, Due 2/14)     41,325     40,003     35,794  
                     

  Total Investment           40,003     35,794  
                     

Callidus Debt Partners
CDO Fund I, Ltd.(4)(10)

  Class C Notes (12.9%, Due 12/13)     18,800     18,907     10,116  

    (CDO)

  Class D Notes (17.0%, Due 12/13)     9,400     9,454      
                     

  Total Investment           28,361     10,116  
                     

Callidus Debt Partners
CLO Fund III, Ltd.(4)(10)
(CLO)

  Preferred Shares (23,600,000 shares)           20,138     5,402  
                     

  Total Investment           20,138     5,402  
                     

F-213


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Callidus Debt Partners
CLO Fund IV, Ltd.(4)(10)

  Class D Notes (9.1%, Due 4/20)   $ 3,000   $ 2,045   $ 1,445  

    (CLO)

  Income Notes (13.2%)(11)           14,591     10,628  
                     

  Total Investment           16,636     12,073  
                     

Callidus Debt Partners
CLO Fund V, Ltd.(4)(10)
(CLO)

  Income Notes (16.4%)(11)           13,388     10,331  
                     

  Total Investment           13,388     10,331  
                     

Callidus Debt Partners
CLO Fund VI, Ltd.(4)(10)

  Class D Notes (9.8%, Due 10/21)     9,000     7,144     3,929  

    (CLO)

  Income Notes (17.8%)(11)           28,314     23,090  
                     

  Total Investment           35,458     27,019  
                     

Callidus Debt Partners
CLO Fund VII, Ltd.(4)(10)
(CLO)

  Income Notes (11.4%)(11)           24,026     15,361  
                     

  Total Investment           24,026     15,361  
                     

Callidus MAPS CLO Fund I LLC(10)

  Class E Notes (7.0%, Due 12/17)     17,000     17,000     9,813  

    (CLO)

  Income Notes (4.0%)(11)           45,053     27,678  
                     

  Total Investment           62,053     37,491  
                     

Callidus MAPS CLO Fund II, Ltd.(4)(10)

  Class D Notes (8.8%, Due 7/22)     7,700     3,555     2,948  

    (CLO)

  Income Notes (13.3%)(11)           18,393     12,626  
                     

  Total Investment           21,948     15,574  
                     

Carlisle Wide Plank Floors, Inc. 

  Senior Loan (6.1%, Due 6/11)     1,000     998     953  

    (Consumer Products)

  Unitranche Debt (14.5%, Due 6/11)     3,161     3,139     3,047  

  Preferred Stock (345,056 Shares)           345     82  
                     

  Total Investment           4,482     4,082  
                     

Catterton Partners VI, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           2,812     2,356  
                     

  Total Investment           2,812     2,356  
                     

Centre Capital Investors V, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           3,049     2,344  
                     

  Total Investment           3,049     2,344  
                     

CK Franchising, Inc. 

  Subordinated Debt (12.3%, Due 7/12 - 7/17)     21,000     20,912     20,912  

  Preferred Stock (1,281,887 shares)           1,282     1,592  

  Common Stock (7,585,549 shares)           7,586     10,600  
                     

  Total Investment           29,780     33,104  
                     

Commercial Credit Group, Inc. 

  Subordinated Debt (15.0%, Due 6/15)     19,000     18,970     18,970  

    (Financial Services)

  Preferred Stock (64,679 shares)           15,543     9,073  

  Warrants                
                     

  Total Investment           34,513     28,043  
                     

Community Education Centers, Inc.
(Education Services)

  Subordinated Debt (14.5%, Due 11/13)     35,548     35,486     34,056  
                     

  Total Investment           35,486     34,056  
                     

Component Hardware Group, Inc.
(Industrial Products)

  Subordinated Debt (13.5%, Due 1/13)     18,710     18,654     18,261  
                     

  Total Investment           18,654     18,261  
                     

                       

F-214


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

Cook Inlet Alternative Risk, LLC

  Unitranche Debt (10.8%, Due 4/13)   $ 90,000   $ 89,619   $ 82,839  

    (Business Services)

  Equity Interests           552      
                     

  Total Investment           90,171     82,839  
                     

Cortec Group Fund IV, L.P.(5)
(Private Equity)

  Limited Partnership Interest           4,647     3,445  
                     

  Total Investment           4,647     3,445  
                     

Diversified Mercury
Communications, LLC
(Business Services)

 
Senior Loan (4.5%, Due 3/13)
   
2,972
   
2,958
   
2,692
 
                     

  Total Investment           2,958     2,692  
                     

Digital VideoStream, LLC

  Unitranche Debt (11.0%, Due 2/12)     14,097     14,032     14,003  

    (Business Services)

  Convertible Subordinated Debt (10.0%, Due 2/16)     4,545     4,533     4,700  
                     

  Total Investment           18,565     18,703  
                     

DirectBuy Holdings, Inc. 

  Subordinated Debt (14.5%, Due 5/13)     75,909     75,609     71,703  

    (Consumer Products)

  Equity Interests           8,000     3,200  
                     

  Total Investment           83,609     74,903  
                     

Distant Lands Trading Co. 

  Senior Loan (7.5%, Due 11/11)     4,825     4,800     4,501  

    (Consumer Products)

  Unitranche Debt (12.3%, Due 11/11)     43,133     43,022     42,340  

  Common Stock (3,451 shares)           3,451     984  
                     

  Total Investment           51,273     47,825  
                     

Dryden XVIII Leveraged

  Class B Notes (8.0%, Due 10/19)     9,000     7,728     4,535  

Loan 2007 Limited(4)
(CLO)

  Income Notes (16.0%)(11)           22,080     17,477  
                     

  Total Investment           29,808     22,012  
                     

Dynamic India Fund IV(4)(5)
(Private Equity Fund)

  Equity Interests           9,350     8,966  
                     

  Total Investment           9,350     8,966  
                     

EarthColor, Inc. 

  Subordinated Debt (15.0%, Due 11/13)(6)     123,819     123,385     77,243  

    (Business Services)

  Common Stock (63,438 shares)(12)           63,438      

  Warrants(12)                
                     

  Total Investment           186,823     77,243  
                     

eCentury Capital Partners, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           7,274     1,431  
                     

  Total Investment           7,274     1,431  
                     

eInstruction Corporation

  Subordinated Debt (12.6%, Due 7/14-1/15)     33,931     33,795     31,670  

    (Education Services)

  Common Stock (2,406 shares)           2,500     1,700  
                     

  Total Investment           36,295     33,370  
                     

Farley's & Sathers Candy Company, Inc.
(Consumer Products)

  Subordinated Debt (10.1%, Due 3/11)     2,500     2,493     2,365  
                     

  Total Investment           2,493     2,365  
                     

FCP-BHI Holdings, LLC

  Subordinated Debt (12.0%, Due 9/13)     27,284     27,191     25,640  

d/b/a Bojangles'
(Retail)

  Equity Interests           1,029     1,700  
                     

  Total Investment           28,220     27,340  
                     

Fidus Mezzanine Capital, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           9,597     6,754  
                     

F-215


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

  Total Investment         $ 9,597   $ 6,754  
                     

Freedom Financial Network, LLC
(Financial Services)

  Subordinated Debt (13.5%, Due 2/14)   $ 13,000     12,945     12,811  
                     

  Total Investment           12,945     12,811  
                     

Geotrace Technologies, Inc.
(Energy Services)

  Warrants           2,027     3,000  
                     

  Total Investment           2,027     3,000  
                     

Gilchrist & Soames, Inc. 

  Subordinated Debt (13.4%, Due 10/13)     25,800     25,660     24,692  
                     

  Total Investment           25,660     24,692  
                     

Havco Wood Products LLC
(Industrial Products)

  Equity Interests           910     400  
                     

  Total Investment           910     400  
                     

Higginbotham Insurance Agency, Inc. 

  Subordinated Debt (13.7%, Due 8/13-8/14)     53,305     53,088     53,088  

    (Business Services)

  Common Stock (23,695 shares)(12)           23,695     27,335  

  Warrant(12)                
                     

  Total Investment           76,783     80,423  
                     

The Hillman Companies, Inc.(3)
(Consumer Products)

  Subordinated Debt (10.0%, Due 9/11)     44,580     44,491     44,345  
                     

  Total Investment           44,491     44,345  
                     

The Homax Group, Inc. 

  Senior Loan (7.2%, Due 10/12)     11,785     11,742     10,689  

    (Consumer Products)

  Subordinated Debt (14.5%, Due 4/14)     14,000     13,371     12,859  

  Preferred Stock (76 shares)           76      

  Common Stock (24 shares)           5      

  Warrants           954      
                     

  Total Investment           26,148     23,548  
                     

Ideal Snacks Corporation
(Consumer Products)

  Senior Loan (5.3%, Due 6/10)     1,496     1,496     1,438  
                     

  Total Investment           1,496     1,438  
                     

Kodiak Fund LP(5)
(Private Equity Fund)

  Equity Interests           9,422     900  
                     

  Total Investment           9,422     900  
                     

Market Track Holdings, LLC

  Senior Loan (8.0%, Due 6/14)     2,500     2,450     2,352  

    (Business Services)

  Subordinated Debt (15.9%, Due 6/14)     24,600     24,488     23,785  
                     

  Total Investment           26,938     26,137  
                     

NetShape Technologies, Inc.
(Industrial Products)

  Senior Loan (5.3%, Due 2/13)     382     382     346  
                     

  Total Investment           382     346  
                     

Network Hardware Resale, Inc. 

  Unitranche Debt (12.5%, Due 12/11)     18,734     18,809     18,703  

    (Business Services)

  Convertible Subordinated Debt                    

  (9.8%, Due 12/15)     14,533     14,585     14,585  
                     

  Total Investment           33,394     33,288  
                     

Novak Biddle Venture Partners III, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           2,018     1,349  
                     

  Total Investment           2,018     1,349  
                     

Oahu Waste Services, Inc.
(Business Services)

  Stock Appreciation Rights           206     750  
                     

  Total Investment           206     750  
                     

Pangaea CLO 2007-1 Ltd.(4)
(CLO)

  Class D Notes (9.2%, Due 10/21)     15,000     11,761     7,114  
                     

  Total Investment           11,761     7,114  
                     

                       

F-216


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

PC Helps Support, LLC

  Senior Loan (4.8%, Due 12/13)   $ 8,610   $ 8,520   $ 8,587  

    (Business Services)

  Subordinated Debt (13.3%, Due 12/13)     28,136     28,009     28,974  
                     

  Total Investment           36,529     37,561  
                     

Performant Financial Corporation
(Business Services)

  Common Stock (478,816 shares)           734     200  
                     

  Total Investment           734     200  
                     

Peter Brasseler Holdings, LLC
(Business Services)

  Equity Interests           3,451     2,900  
                     

  Total Investment           3,451     2,900  
                     

PharMEDium Healthcare Corporation
(Healthcare Services)

  Senior Loan (4.3%, Due 10/13)     1,910     1,910     1,747  
                     

  Total Investment           1,910     1,747  
                     

Postle Aluminum Company, LLC

  Unitranche Debt (13.0%, Due 10/12)(6)     58,953     58,744     9,978  

    (Industrial Products)

  Equity Interests           2,174      
                     

  Total Investment           60,918     9,978  
                     

Pro Mach, Inc. 

  Subordinated Debt (12.5%, Due 6/12)     14,616     14,573     14,089  

    (Industrial Products)

  Equity Interests           1,294     1,900  
                     

  Total Investment           15,867     15,989  
                     

Promo Works, LLC
(Business Services)

  Unitranche Debt (12.3%, Due 12/11)     23,111     22,954     21,266  
                     

  Total Investment           22,954     21,266  
                     

Reed Group, Ltd. 

  Senior Loan (7.6%, Due 12/13)     12,893     12,758     11,502  

    (Healthcare Services)

  Subordinated Debt (13.8%, Due 12/13)     18,543     18,469     16,683  

  Equity Interests           1,800     300  
                     

  Total Investment           33,027     28,485  
                     

S.B. Restaurant Company

  Unitranche Debt (9.8%, Due 4/11)     36,501     36,295     34,914  

(Retail)

  Preferred Stock (46,690 shares)           117     117  

  Warrants           534      
                     

  Total Investment           36,946     35,031  
                     

  Standby Letters of Credit ($2,465)                    

Snow Phipps Group, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           4,785     4,374  
                     

  Total Investment           4,785     4,374  
                     

SPP Mezzanine Funding II, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           9,362     9,269  
                     

  Total Investment           9,362     9,269  
                     

STS Operating, Inc.
(Industrial Products)

  Subordinated Debt (11.0%, Due 1/13)     30,386     30,296     29,745  
                     

  Total Investment           30,296     29,745  
                     

Summit Energy Services, Inc. 

  Subordinated Debt (11.6%, Due 8/13)     35,730     35,547     32,113  

  Common Stock (415,982 shares)           1,861     1,900  
                     

  Total Investment           37,408     34,013  
                     

Tank Intermediate Holding Corp. 

  Senior Loan (7.1%, Due 9/14)     30,514     29,539     25,937  

  Total Investment           29,539     25,937  
                     

Tappan Wire & Cable Inc. 

  Unitranche Debt (15.0%, Due 8/14)     22,346     22,248     15,625  

    (Business Services)

  Common Stock (12,940 shares)(12)           2,043      

  Warrant(12)                
                     

                       

F-217


Private Finance Portfolio Company
  Investment(1)(2)   Principal   Cost   Value  

  Total Investment         $ 24,291   $ 15,625  
                     

The Step2 Company, LLC

  Unitranche Debt (11.0%, Due 4/12)   $ 95,083     94,816     90,474  

    (Consumer Products)

  Equity Interests           2,156     1,161  
                     

  Total Investment           96,972     91,635  
                     

Tradesmen International, Inc.
(Business Services)

  Subordinated Debt (12.0%, Due 12/12)     40,000     39,586     37,840  
                     

  Total Investment           39,586     37,840  
                     

TransAmerican Auto Parts, LLC

  Subordinated Debt (16.3%, Due 11/12)(6)     24,561     24,409      

    (Consumer Products)

  Equity Interests           1,034      
                     

  Total Investment           25,443      
                     

Trover Solutions, Inc.
(Business Services)

  Subordinated Debt (12.0%, Due 11/12)     60,054     59,847     57,362  
                     

  Total Investment           59,847     57,362  
                     

United Road Towing, Inc.
(Consumer Services)

  Subordinated Debt (12.1%, Due 1/14)     20,000     19,915     20,000  
                     

  Total Investment           19,915     20,000  
                     

Venturehouse-Cibernet Investors, LLC
(Business Services)

  Equity Interest                
                     

  Total Investment                
                     

VICORP Restaurants, Inc.
(Retail)

  Warrants           33      
                     

  Total Investment           33      
                     

WMA Equity Corporation and Affiliates

        139,455     138,559     63,823  

d/b/a Wear Me Apparel

  Subordinated Debt (16.8%, Due 4/13-4/14)(6)           39,721      

(Consumer Products)

  Common Stock (86 shares)                    
                     

  Total Investment           178,280     63,823  
                     

Webster Capital II, L.P.(5)
(Private Equity Fund)

  Limited Partnership Interest           1,702     1,481  
                     

  Total Investment           1,702     1,481  
                     

Woodstream Corporation

  Subordinated Debt (12.0%, Due 2/15)     90,000     89,633     83,258  

    (Consumer Products)

  Common Stock (6,960 shares)           6,961     2,500  
                     

  Total Investment           96,594     85,758  
                     

York Insurance Services Group, Inc.
(Business Services)

  Common Stock (12,939 shares)           1,294     1,700  
                     

  Total Investment           1,294     1,700  
                     

Other companies

  Other debt investments     155     74     72  

  Other equity investments           30     8  
                     

  Total Investment           104     80  
                     

Total companies less than 5% owned

            $ 2,317,856   $ 1,858,581  
                     

Total private finance (138 portfolio investments)

            $ 4,877,392   $ 3,399,063  
                     

F-218


Commercial Real Estate Finance
(in thousands, except number of loans)

 
   
   
  December 31, 2008  
 
  Stated Interest
Rate Ranges
  Number of
Loans
 
 
  Cost   Value  

Commercial Mortgage Loans

                       

  Up to 6.99%     4   $ 30,999   $ 30,537  

  7.00%–8.99%     1     644     580  

  9.00%–10.99%     1     6,465     6,465  

  11.00%–12.99%     1     10,469     9,391  

  15.00% and above     2     3,970     6,529  
                     

Total commercial mortgage loans(13)

            $ 52,547   $ 53,502  
                     

Real Estate Owned

            $ 18,201   $ 20,823  
                     

Equity Interests(2)—Companies more than 25% owned

            $ 14,755   $ 19,562  
                     

Guarantees ($6,871)

                       

Standby Letter of Credit ($650)

                       

Total commercial real estate finance

            $ 85,503   $ 93,887  
                     

Total portfolio

            $ 4,962,895   $ 3,492,950  
                     

 

 
  Yield   Cost   Value  

Investments in Money Market and Other Securities

                   

SEI Daily Income Tr Prime Obligation Money Market Fund

    0.9 % $ 5   $ 5  

Columbia Treasury Reserves Fund

        12     12  

Other Money Market Funds

        270     270  
                 

Total

        $ 287   $ 287  
                 

(1)
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.

(2)
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.

(3)
Public company.

(4)
Non-U.S. company or principal place of business outside the U.S.

(5)
Non-registered investment company.

(6)
Loan or debt security is on non-accrual status and therefore is considered non-income producing.

(7)
Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated companies.

(8)
Crescent Equity Corp. holds investments in Crescent Hotels & Resorts, LLC and affiliates.

(10)
The fund is managed by Callidus Capital, a portfolio company of Allied Capital.

(11)
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations.

(12)
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.

(13)
Commercial mortgage loans totaling $7.7 million at value were on non-accrual status and therefore were considered non-income producing.

The accompanying notes are an integral part of these consolidated financial statements.

F-219



ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.   Organization

              Allied Capital Corporation, a Maryland corporation, is a closed-end, non-diversified management investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940 ("1940 Act"). Allied Capital Corporation ("ACC") has a real estate investment trust subsidiary, Allied Capital REIT, Inc. ("Allied REIT"), and several subsidiaries that are single member limited liability companies established for specific purposes including holding real estate properties. ACC also has a subsidiary, A.C. Corporation ("AC Corp"), that generally provides diligence and structuring services, as well as transaction, management, consulting, and other services, including underwriting and arranging senior loans, to the Company, its portfolio companies and its managed funds.

              ACC and its subsidiaries, collectively, are referred to as the "Company." The Company consolidates the results of its subsidiaries for financial reporting purposes.

              Pursuant to Accounting Standards Codification ("ASC") Topic 810 "Consolidations", the financial results of the Company's portfolio investments are not consolidated in the Company's financial statements. Portfolio investments are held for purposes of deriving investment income and future capital gains.

              The investment objective of the Company is to achieve current income and capital gains. In order to achieve this objective, the Company has primarily invested in debt and equity securities of private companies in a variety of industries.

Note 2.   Summary of Significant Accounting Policies

              The consolidated financial statements include the accounts of ACC and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 2008 balances to conform with the 2009 financial statement presentation.

              In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles," which was primarily codified into ASC Topic 105, "Generally Accepted Accounting Standards." This standard is the single source of authoritative non-governmental U.S. generally accepted accounting principles ("GAAP"), superseding existing FASB, American Institute of Certified Public Accountants ("AICPA"), Emerging Issues Task Force ("EITF"), and related accounting literature. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. This guidance is effective for financial statements issued for reporting periods that end after September 15, 2009. This guidance impacts the Company's consolidated financial statements and related disclosures as all references to authoritative literature reflect the newly adopted codification.

              The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the unaudited consolidated financial results of the Company included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of September 30, 2009, the results of operations for the three and nine months ended September 30, 2009 and 2008, and changes in net assets and cash flows for the nine months ended September 30, 2009 and 2008. The results of operations for the three and nine months ended September 30, 2009, are not necessarily indicative of the operating results to be expected for the full year.

F-220


              The private finance portfolio and the interest and related portfolio income and net realized gains (losses) on the private finance portfolio are presented in three categories: companies more than 25% owned, which represent portfolio companies where the Company directly or indirectly owns more than 25% of the outstanding voting securities of such portfolio company or where the Company controls the portfolio company's board of directors and, therefore, are deemed controlled by the Company under the 1940 Act; companies owned 5% to 25%, which represent portfolio companies where the Company directly or indirectly owns 5% to 25% of the outstanding voting securities of such portfolio company or where the Company holds one or more seats on the portfolio company's board of directors and, therefore, are deemed to be an affiliated person under the 1940 Act; and companies less than 5% owned which represent portfolio companies where the Company directly or indirectly owns less than 5% of the outstanding voting securities of such portfolio company and where the Company has no other affiliations with such portfolio company. The interest and related portfolio income and net realized gains (losses) from the commercial real estate finance portfolio and other sources, including investments in money market and other securities, are included in the companies less than 5% owned category on the consolidated statement of operations.

              In the ordinary course of business, the Company enters into transactions with portfolio companies that may be considered related party transactions.

              The Company, as a BDC, has invested in illiquid securities including debt and equity securities of portfolio companies, CLO bonds and preferred shares/income notes, CDO bonds and investment funds. The Company's investments may be subject to certain restrictions on resale and generally have no established trading market. The Company values substantially all of its investments at fair value as determined in good faith by the Board of Directors in accordance with the Company's valuation policy and the provisions of the 1940 Act and ASC Topic 820 "Financial Instruments," which codified FASB Statement No. 157, Fair Value Measurements. The Company determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. The Company's valuation policy considers the fact that no ready market exists for substantially all of the securities in which it invests and that fair value for its investments must typically be determined using unobservable inputs. The Company's valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio.

              The Company adopted the standards in ASC Topic 820 on a prospective basis in the first quarter of 2008. These standards require the Company to assume that the portfolio investment is to be sold in the principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with the standards, the Company has considered its principal market, or the market in which the Company exits its portfolio investments with the greatest volume and level of activity.

              The Company has determined that for its buyout investments, where the Company has control or could gain control through an option or warrant security, both the debt and equity securities of the portfolio investment would exit in the merger and acquisition ("M&A") market as the principal market generally through a sale or recapitalization of the portfolio company. The Company believes that the in-use premise of value (as defined in ASC Topic 820), which assumes the debt and equity securities are sold together, is appropriate as this would provide maximum proceeds to the seller. As a result, the Company uses the enterprise value methodology to determine the fair value of these investments. Enterprise value means the entire value of the company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. Enterprise value is determined using various factors, including cash flow from operations of the portfolio company, multiples at which private companies are bought and sold, and other pertinent factors, such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the

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portfolio company's equity securities, liquidation events, or other events. The Company allocates the enterprise value to these securities in order of the legal priority of the securities.

              While the Company typically exits its securities upon the sale or recapitalization of the portfolio company in the M&A market, for investments in portfolio companies where the Company does not have control or the ability to gain control through an option or warrant security, the Company cannot typically control the exit of its investment into its principal market (the M&A market). As a result, in accordance with ASC Topic 820, the Company is required to determine the fair value of these investments assuming a sale of the individual investment (the in-exchange premise of value) in a hypothetical market to a hypothetical market participant. The Company continues to perform an enterprise value analysis for the investments in this category to assess the credit risk of the loan or debt security and to determine the fair value of its equity investment in these portfolio companies. The determined equity values are generally discounted when the Company has a minority ownership position, restrictions on resale, specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other factors. For loan and debt securities, the Company performs a yield analysis assuming a hypothetical current sale of the investment. The yield analysis requires the Company to estimate the expected repayment date of the instrument and a market participant's required yield. The Company's estimate of the expected repayment date of a loan or debt security may be shorter than the legal maturity of the instruments as the Company's loans have historically been repaid prior to the maturity date. The yield analysis considers changes in interest rates and changes in leverage levels of the loan or debt security as compared to market interest rates and leverage levels. Assuming the credit quality of the loan or debt security remains stable, the Company will use the value determined by the yield analysis as the fair value for that security. A change in the assumptions that the Company uses to estimate the fair value of its loans and debt securities using the yield analysis could have a material impact on the determination of fair value. If there is deterioration in credit quality or a loan or debt security is in workout status, the Company may consider other factors in determining the fair value of a loan or debt security, including the value attributable to the loan or debt security from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis.

              The Company's equity investments in private debt and equity funds are generally valued based on the fund's net asset value, unless other factors lead to a determination of fair value at a different amount. The value of the Company's equity securities in public companies for which quoted prices in an active market are readily available is based on the closing public market price on the measurement date.

              The fair value of the Company's CLO bonds and preferred shares/income notes and CDO bonds ("CLO/CDO Assets") is generally based on a discounted cash flow model that utilizes prepayment, re-investment, loss and ratings assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar bonds and preferred shares/ income notes, when available. The Company recognizes unrealized appreciation or depreciation on its CLO/CDO Assets as comparable yields in the market change and/or based on changes in estimated cash flows resulting from changes in prepayment, re-investment, loss or ratings assumptions in the underlying collateral pool or changes in redemption assumptions for the CLO/CDO Assets, if applicable. The Company determines the fair value of its CLO/CDO Assets on an individual security-by-security basis.

              The Company records unrealized depreciation on investments when it determines that the fair value of a security is less than its cost basis, and records unrealized appreciation when it determines that the fair value is greater than its cost basis. Because of the inherent uncertainty of valuation, the values determined at the measurement date may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the

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investments may cause the gains or losses ultimately realized on these investments to be different than the values determined at the measurement date. In accordance with ASC Topic 820 (discussed below), the Company does not consider a transaction price that is associated with a transaction that is not orderly to be indicative of fair value or market participant risk premiums, and accordingly would place little, if any, weight on transactions that are not orderly in determining fair value. When considering recent potential or completed transactions, the Company uses judgment in determining if such offers or transactions were pursuant to an orderly process for purposes of determining how much weight is placed on these data points in accordance with the applicable guidelines in ASC Topic 820.

              Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. Net change in unrealized appreciation or depreciation also reflects the change in the value of U.S. Treasury bills, when applicable, and depreciation on accrued interest and dividends receivable and other assets where collection is doubtful.

              Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. For loans and debt securities with contractual payment-in-kind interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, the Company will not accrue payment-in-kind interest if the portfolio company valuation indicates that the payment-in-kind interest is not collectible. In general, interest is not accrued on loans and debt securities if the Company has doubt about interest collection or where the enterprise value of the portfolio company may not support further accrual. Interest may not accrue on loans or debt securities to portfolio companies that are more than 50% owned by the Company depending on such company's capital requirements.

              When the Company receives nominal cost warrants or free equity securities ("nominal cost equity"), the Company allocates its cost basis in its investment between its debt securities and its nominal cost equity at the time of origination. At that time, the original issue discount basis of the nominal cost equity is recorded by increasing the cost basis in the equity and decreasing the cost basis in the related debt securities. Loan origination fees, original issue discount, and market discount are capitalized and then amortized into interest income using a method that approximates the effective interest method. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as interest income and any unamortized original issue discount or market discount is recorded as a realized gain.

              The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, divided by (b) total loans and debt securities at value. The weighted average yield is computed as of the balance sheet date.

              The Company recognizes interest income on the CLO preferred shares/income notes using the effective interest method, based on the anticipated yield that is determined using the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses, ratings or

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asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the preferred shares/income notes from the date the estimated yield was changed. CLO and CDO bonds have stated interest rates. The weighted average yield on the CLO/CDO Assets is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective yield on the preferred shares/income notes, divided by (b) CLO/CDO Assets at value. The weighted average yields are computed as of the balance sheet date.

              Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are expected to be collected and to the extent that the Company has the option to receive the dividend in cash. Dividend income on common equity securities is recorded on the record date for private companies or on the ex-dividend date for publicly traded companies.

              Fee income includes fees for loan prepayment premiums, guarantees, commitments and services rendered by the Company to portfolio companies and other third parties such as diligence, structuring, transaction services, management and consulting services, and other services. Loan prepayment premiums are recognized at the time of prepayment. Guaranty and commitment fees are generally recognized as income over the related period of the guaranty or commitment, respectively. Diligence, structuring, and transaction services fees are generally recognized as income when services are rendered or when the related transactions are completed. Management, consulting and other services fees, including fund management fees, are generally recognized as income as the services are rendered. Fees are not accrued if the Company has doubt about collection of those fees.

              Cash and cash equivalents represents unrestricted cash and highly liquid securities with original maturities of 90 days or less.

              Guarantees meeting the characteristics described in ASC Topic 460, "Guarantees" and issued or modified after December 31, 2002, are recognized at fair value at inception. Guarantees made on behalf of portfolio companies are considered in determining the fair value of the Company's investments. See Note 5.

              Debt financing costs are based on actual costs incurred in obtaining debt financing and generally are deferred and amortized as part of interest expense over the term of the related debt instrument using a method that approximates the effective interest method. Costs associated with the issuance of common stock are recorded as a reduction to the proceeds from the sale of common stock. Financing costs generally include underwriting, accounting and legal fees, and printing costs.

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

              The Company has a stock-based employee compensation plan. See Note 9. Effective January 1, 2006, the Company adopted the provisions of FASB Statement No. 123 (Revised 2004), Share-Based Payment ("SFAS 123R"), which was primarily codified into ASC Topic 718, "Compensation—Stock

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Compensation". These standards were adopted using the modified prospective method of application, which required the Company to recognize compensation costs on a prospective basis beginning January 1, 2006. Accordingly, the Company did not restate prior year financial statements. Under this method, the unamortized cost of previously awarded options that were unvested as of January 1, 2006, is recognized over the remaining service period in the statement of operations beginning in 2006, using the fair value amounts determined for pro forma disclosure under these standards. With respect to options granted on or after January 1, 2006, compensation cost based on estimated grant date fair value is recognized over the related service period in the statement of operations.

              The stock option expense for the three and nine months ended September 30, 2009 and 2008, was as follows:

 
  For the Three Months
Ended September 30,
  For the Nine Months
Ended September 30,
 
($ in millions, except per share amounts)
  2009   2008   2009   2008  

Employee Stock Option Expense:

                         

Previously awarded, unvested options as of January 1, 2006

  $   $   $   $ 3.9  

Options granted on or after January 1, 2006

    0.4     1.5     2.4     5.6  
                   

Total employee stock option expense

  $ 0.4   $ 1.5   $ 2.4   $ 9.5  
                   

Per basic share

  $ 0.00   $ 0.01   $ 0.01   $ 0.06  

Per diluted share

  $ 0.00   $ 0.01   $ 0.01   $ 0.06  

              Options Granted.    The stock option expense shown in the table above was based on the underlying value of the options granted by the Company. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model and expensed over the vesting period. The following weighted average assumptions were used to calculate the fair value of options granted during the three and nine months ended September 30, 2009 and 2008:

 
  For the Three
Months Ended
September 30,
  For the Nine
Months Ended
September 30,
 
 
  2009   2008   2009   2008  

Expected term (in years)

        5.0     3.0     5.0  

Risk-free interest rate

        3.4 %   1.3 %   2.8 %

Expected volatility

        32.8 %   105.0 %   27.8 %

Dividend yield

        8.5 %   32.5 %   8.5 %

Weighted average fair value per option

      $ 1.81   $ 0.21   $ 2.18  

              The expected term of the options granted represents the period of time that such options are expected to be outstanding. To determine the expected term of the options, the Company used historical and other data to estimate option exercise time frames, including considering employee terminations. The risk free rate was based on the U.S. Treasury bond yield curve at the date of grant consistent with the expected term. Expected volatilities were determined based on the historical volatility of the Company's common stock over a historical time period consistent with the expected term. The dividend yield was determined based on an estimate of the Company's future dividends over the expected term, relative to the option price. The estimate of future dividends takes into consideration the Company's estimate of future taxable income required to be distributed in order to maintain its status as a registered investment company (see "Federal and State Income Taxes and Excise Tax" below). The Company currently is not paying a dividend and may or may not be able to pay a dividend during the expected term. In addition, actual future taxable income and dividends may significantly differ from these estimates.

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              To determine the stock options expense for options granted, the calculated fair value of the options granted is applied to the options granted, net of assumed future option forfeitures. The Company estimates that the employee-related stock option expense will be $3.4 million, $3.9 million, and $4.0 million for the years ended December 31, 2009, 2010, and 2011, respectively. This estimate may change if the Company's assumptions related to future option forfeitures change. This estimate does not include any expense related to stock option grants after September 30, 2009, as the fair value of those stock options will be determined at the time of grant. The aggregate total stock option expense remaining as of September 30, 2009, is expected to be recognized over an estimated weighted-average period of 1.30 years.

              The Company has complied with the requirements of the Code that are applicable to regulated investment companies ("RIC") and real estate investment trusts ("REIT"). ACC and any subsidiaries that qualify as a RIC or a REIT intend to distribute or retain through a deemed distribution all of their annual taxable income to shareholders; therefore, the Company has made no provision for income taxes exclusive of excise taxes for these entities.

              If the Company does not distribute at least 98% of its annual taxable income in the year earned, the Company will generally be required to pay an excise tax equal to 4% of the amount by which 98% of the Company's annual taxable income exceeds the distributions from such taxable income during the year earned. 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 from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.

              Income taxes for AC Corp are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

              Basic earnings per common share is calculated using the weighted average number of common shares outstanding for the period presented. Diluted earnings per common share reflects the potential dilution that could occur if options to issue common stock were exercised into common stock. Common stock equivalents of 3,814,040 shares and 5,703 shares were not included in the calculation of diluted earnings (loss) per common share for the nine months ended September 30, 2009 and 2008, respectively, as the effect would have been antidilutive.

              The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

              The consolidated financial statements include portfolio investments at value of $2.5 billion and $3.5 billion at September 30, 2009, and December 31, 2008, respectively. At September 30, 2009, and December 31, 2008, 88% and 94%, respectively, of the Company's total assets represented portfolio investments whose fair values have been determined by the Board of Directors in good faith in the

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absence of readily available market values. Because of the inherent uncertainty of valuation, the Board of Directors' determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.

              Fair Value Measurements.    In September 2006, the FASB issued Statement No. 157, which was primarily codified into ASC Topic 820, defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

              The Company adopted this statement on a prospective basis beginning in the quarter ended March 31, 2008. The initial adoption of this statement did not have a material effect on the Company's consolidated financial statements.

              ASC Topic 820 also includes the codification of Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active ("FSP 157-3"), which was issued by the FASB in October 2008. These provisionsapply to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with ASC Topic 820. These provisions of ASC Topic 820 provide clarification in a market that is not active and provide an example to illustrate key considerations in determining the fair value.

              The Company applied these provisions of ASC Topic 820 relating to determining the fair value of a financial asset when the market for that asset is not active, in determining the fair value of its portfolio investments at December 31, 2008. The application of these provisions did not have a material impact on the Company's consolidated financial position or its results of operations.

              ASC Topic 820 also includes the codification of Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly ("FSP 157-4"), which was issued by the FASB in April 2009. These provisions provide guidance on how to determine the fair value of assets under ASC Topic 820 in the current economic environment and reemphasize that the objective of a fair value measurement remains an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. These provisions state that a transaction price that is associated with a transaction that is not orderly is not determinative of fair value or market-participant risk premiums and companies should place little, if any, weight (compared with other indications of fair value) on transactions that are not orderly when estimating fair value or market risk premiums.

              The Company adopted these provisions of ASC Topic 820 on a prospective basis beginning in the quarter ending March 31, 2009. The adoption of these provisions did not have a material effect on the Company's consolidated financial statements.

              The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115, which was primarily codified into ASC Topic 320. In February 2007, the FASB issued Statement No. 159, which was primarily codified into ASC Topic 825, permits an entity to choose to measure many financial instruments and certain other items at fair value. This statement applies to all reporting entities, and contains financial statement presentation and disclosure requirements for assets and liabilities reported at fair value as a consequence of the election. This statement was effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

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              The Company did not elect fair value measurement for assets or liabilities other than portfolio investments, which already were required to be measured at fair value, therefore, the adoption of this statement did not impact the Company's consolidated financial position or its results of operations.

              Subsequent Events ("SFAS 165"), which was primarily codified into ASC Topic 855. In May 2009, the FASB issued SFAS 165 which establishes general standards for reporting events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. This standard requires the disclosure of the date through which an entity has evaluated subsequent events and whether that date represents the date the financial statements were issued or were available to be issued.

              The Company adopted these provisions of ASC 855 in the quarter ended June 30, 2009. The adoption of these provisions did not have a material impact on the Company's financial statements.

              Accounting for Transfers of Financial Assets ("SFAS 166"), which has not yet been codified. In June 2009, the FASB issued SFAS 166, which changes the conditions for reporting a transfer of a portion of a financial asset as a sale and requires additional year-end and interim disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009.

              The implementation of SFAS 166 is not expected to have a material impact on the Company's financial statements.

              Amendments to FASB Interpretation No. 46(R) ("SFAS 167"), which will be codified into ASC Topic 810, Consolidation. In June 2009, the FASB issued SFAS 167, which amends the guidance on accounting for variable interest entities. SFAS 167 is effective for fiscal years beginning after November 15, 2009 and interim periods within that fiscal year. The Company has not completed the process of evaluating the impact of adopting this standard.

              The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("SFAS 168"), which was primarily codified into Topic 105, was issued by the FASB in July 2009 This standard, which supersedes SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, establishes the FASB Accounting Standards Codification, which will become the source of authoritative GAAP recognized by the FASB. This standard is effective for the period ending after September 15, 2009. The implementation of this standard did not have a material impact on the Company's financial statements.

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Note 3.   Portfolio

              At September 30, 2009, and December 31, 2008, the private finance portfolio consisted of the following:

 
  2009   2008  
($ in millions)
  Cost   Value   Yield(1)   Cost   Value   Yield(1)  

Loans and debt securities:

                                     

Senior loans

  $ 553.1   $ 289.4     4.8 % $ 556.9   $ 306.3     5.6 %

Unitranche debt(2)

    424.9     374.7     12.2 %   527.5     456.4     12.0 %

Subordinated debt(3)

    1,770.9     1,182.9     13.4 %   2,300.1     1,829.1     12.9 %
                               

Total loans and debt securities(4)

    2,748.9     1,847.0     11.8 %   3,384.5     2,591.8     11.9 %

Equity securities:

                                     

Preferred shares/income notes of CLOs(5)

    245.0     84.4     12.1 %   248.2     179.2     16.4 %

Subordinated certificates in Senior Secured Loan Fund LLC(5)

    165.2     165.0     14.0 %   125.4     125.4     12.0 %

Other equity securities

    1,035.2     346.3           1,119.3     502.7        
                               

Total equity securities

    1,445.4     595.7           1,492.9     807.3        
                               

Total

  $ 4,194.3   $ 2,442.7         $ 4,877.4   $ 3,399.1        
                               

(1)
The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, divided by (b) total loans and debt securities at value. At September 30, 2009, and December 31, 2008, senior loans included the senior secured loan to Ciena totaling $319.0 million and $319.0 million at cost, respectively, and $102.2 million and $104.9 million at value, respectively, which was placed on non-accrual status on the purchase date.
(2)
Unitranche debt is an investment that combines both senior and subordinated financing, generally in a first lien position.

(3)
Subordinated debt includes bonds in CLOs and in a CDO.

(4)
The total principal balance outstanding on loans and debt securities was $2,775.9 million and $3,418.0 million at September 30, 2009, and December 31, 2008, respectively. The difference between principal and cost is represented by unamortized loan origination fees and costs, original issue discounts, and market discounts totaling $27.0 million and $33.5 million at September 30, 2009, and December 31, 2008, respectively.

(5)
Investments in the preferred shares/income notes of CLOs and the subordinated certificates in Senior Secured Loan Fund LLC earn a current return that is included in interest income in the accompanying consolidated statement of operations.

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              The Company's private finance investment activity principally involves providing financing through privately negotiated long-term debt and equity investments. The Company's private finance debt and equity investments generally are issued by private companies and generally are illiquid and may be subject to certain restrictions on resale.

              The Company's private finance debt investments are generally structured as loans and debt securities that carry a relatively high fixed rate of interest, which may be combined with equity features, such as conversion privileges, or warrants or options to purchase a portion of the portfolio company's equity at a pre-determined strike price, which is generally a nominal price for warrants or options in a private company. The annual stated interest rate is only one factor in pricing the investment relative to the Company's rights and priority in the portfolio company's capital structure, and will vary depending on many factors, including if the Company has received nominal cost equity or other components of investment return, such as loan origination fees or market discount. The stated interest rate may include some component of contractual payment-in-kind interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity.

              At September 30, 2009, 80% of the private finance loans and debt securities had a fixed rate of interest and 20% had a floating rate of interest. At December 31, 2008, 85% of the private finance loans and debt securities had a fixed rate of interest and 15% had a floating rate of interest. Senior loans may carry a fixed rate of interest or a floating rate of interest, usually set as a spread over prime or LIBOR, and may require payments of both principal and interest throughout the life of the loan. Senior loans generally have contractual maturities of three to six years and interest is generally paid to the Company monthly or quarterly. Unitranche debt generally carries a fixed rate of interest and generally requires payments of both principal and interest throughout the life of the loan. Unitranche debt generally has contractual maturities of five to six years and interest generally is paid to the Company quarterly. Subordinated debt generally carries a fixed rate of interest generally with contractual maturities of five to ten years and generally has interest-only payments in the early years and payments of both principal and interest in the later years, although maturities and principal amortization schedules may vary. Interest on subordinated debt generally is paid to the Company quarterly.

              Equity securities primarily consist of securities issued by private companies and may be subject to certain restrictions on their resale and are generally illiquid. The Company may make equity investments for minority stakes in portfolio companies or may receive equity features, such as nominal cost warrants. The Company also may invest in the equity (preferred and/or voting or non-voting common) of a portfolio company where the Company's equity ownership may represent a significant portion of the equity, but may or may not represent a controlling interest. If the Company invests in non-voting equity in a buyout investment, the Company generally has the option to acquire a controlling stake in the voting securities of the portfolio company at fair market value. The Company may incur costs associated with making buyout investments that will be included in the cost basis of the Company's equity investment. These include costs such as legal, accounting and other professional fees associated with diligence, referral and investment banking fees, and other costs. Equity securities generally do not produce a current return, but are held with the potential for investment appreciation and ultimate gain on sale.

              Ciena Capital LLC.    Ciena Capital LLC (f/k/a Business Loan Express, LLC) ("Ciena") has provided loans to commercial real estate owners and operators. Ciena has been a participant in the Small Business Administration's 7(a) Guaranteed Loan Program and its wholly-owned subsidiary is licensed by the SBA as a Small Business Lending Company ("SBLC"). Ciena remains subject to SBA rules and regulations. Ciena is headquartered in New York, NY.

F-230


              On September 30, 2008, Ciena voluntarily filed for bankruptcy protection under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Court"). Ciena continues to service and manage its assets as a "debtor-in-possession" under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court.

              As a result of Ciena's decision to file for bankruptcy protection, the Company's unconditional guaranty of the obligations outstanding under Ciena's revolving credit facility became due and the Company, in lieu of paying under its guaranty, purchased the positions of the senior lenders under Ciena's revolving credit facility. As of September 30, 2009, the senior secured loan to Ciena had a cost basis of $319.0 million and a value of $102.2 million. The Company continues to guarantee the remaining principal balance of $5 million, plus related interest, fees and expenses payable to a third party bank. In connection with the Company's continuing guaranty of the amounts held by this bank, the Company has agreed that the amounts owing to the bank under the Ciena revolving credit facility will be paid before any of the secured obligations of Ciena now owed to the Company.

              At September 30, 2009 and December 31, 2008, the Company's investment in Ciena was as follows:

 
  September 30, 2009   December 31, 2008  
($ in millions)
  Cost   Value   Cost   Value  

Senior Loan

  $ 319.0   $ 102.2   $ 319.0   $ 104.9  

Class B Equity Interests(1)

    119.5         119.5      

Class C Equity Interests(1)

    109.1         109.3      
                   

Total(2)

  $ 547.6   $ 102.2   $ 547.8   $ 104.9  
                   

(1)
At September 30, 2009 and December 31, 2008, the Company held 100% of the Class B equity interests and 94.9% of the Class C equity interests.

(2)
In addition to the Company's investment in Ciena included in the portfolio, the Company has amounts receivable from or related to Ciena that are included in other assets in the accompanying consolidated financial statements. See below.

              During the nine months ended September 30, 2009, the Company funded $97.4 million to support Ciena's term securitizations in lieu of draws under related standby letters of credit, including the funding of $46.0 million during the third quarter of 2009. This was required primarily as a result of the issuer of the letters of credit not extending maturing standby letters of credit that were issued under the Company's former revolving line of credit. The amounts funded were recorded as other assets in the accompanying consolidated balance sheet. At September 30, 2009 and December 31, 2008, other assets included amounts receivable from or related to Ciena totaling $112.7 million and $15.4 million, respectively, at cost and $2.0 million and $2.1 million, respectively, at value. Net change in unrealized appreciation or depreciation included a net decrease related to the Company's investment in and receivables from Ciena of $36.8 million and $99.8 million for the three and nine months ended September 30, 2009, respectively. Net change in unrealized appreciation or depreciation included a net decrease in the Company's investment in and receivables from Ciena of $151.9 million and $220.5 million for the three and nine months ended September 30, 2008, respectively.

              At September 30, 2009, the Company had no outstanding standby letters of credit issued under the Company's former line of credit. The Company has considered the letters of credit and the funding thereof in the valuation of Ciena at September 30, 2009 and December 31, 2008.

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              The Company's investment in Ciena was on non-accrual status, therefore the Company did not earn any interest and related portfolio income from its investment in Ciena for each of the three and nine months ended September 30, 2009 and 2008.

              At September 30, 2009, Ciena had one non-recourse securitization SBA loan warehouse facility, which has reached its maturity date but remains outstanding. Ciena is working with the providers of the SBA loan warehouse facility with regard to the repayment of that facility. The Company has issued a performance guaranty whereby the Company agreed to indemnify the warehouse providers for any damages, losses, liabilities and related costs and expenses that they may incur as a result of Ciena's failure to perform any of its obligations as loan originator, loan seller or loan servicer under the warehouse securitizations.

              The Office of the Inspector General of the SBA (OIG) and the United States Secret Service are conducting ongoing investigations of allegedly fraudulently obtained SBA guaranteed loans issued by Ciena. Ciena also is subject to other SBA and OIG audits, investigations, and reviews. In addition, the Office of the Inspector General of the U.S. Department of Agriculture is conducting an investigation of Ciena's lending practices under the Business and Industry Loan (B&I) program. The OIG and the U.S. Department of Justice are also conducting a civil investigation of Ciena's lending practices in various jurisdictions. The Company is unable to predict the outcome of these inquiries, and it is possible that third parties could try to seek to impose liability against the Company in connection with certain defaulted loans in Ciena's portfolio. These investigations, audits and reviews are ongoing.

              These investigations, audits, reviews, and litigation have had and may continue to have a material adverse impact on Ciena and, as a result, could continue to negatively affect the Company's financial results. The Company has considered Ciena's voluntary filing for bankruptcy protection, the letters of credit and the funding thereof, current regulatory issues, ongoing investigations and litigation in performing the valuation of Ciena at September 30, 2009 and at December 31, 2008.

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              Collateralized Loan Obligations ("CLOs") and Collateralized Debt Obligations ("CDOs").    At September 30, 2009, and December 31, 2008, the Company owned bonds and preferred shares/income notes in CLOs and bonds in a CDO as follows:

 
  2009   2008  
($ in millions)
  Cost   Value   Yield(1)   Cost   Value   Yield(1)  

Bonds(2):

                                     

Callidus Debt Partners CDO Fund I, Ltd. 

  $ 29.0   $ 2.9     % $ 28.4   $ 10.1     39.4 %

Callidus Debt Partners CLO Fund IV, Ltd. 

    2.1     1.6     20.9 %   2.0     1.4     26.9 %

Callidus Debt Partners CLO Fund VI, Ltd. 

    7.6     3.8     21.4 %   7.1     3.9     26.1 %

Callidus MAPS CLO Fund I LLC

    17.0     11.4     8.6 %   17.0     9.8     12.2 %

Callidus MAPS CLO Fund II LLC

    3.8     3.1     25.1 %   3.6     3.0     30.2 %

Dryden XVIII Leveraged Loan 2007 Limited

    7.9     2.4     %   7.7     4.5     20.5 %

Knightsbridge CLO 2007-1 Ltd.(3)

    18.7     11.2     15.9 %   18.7     14.9     17.4 %

Knightsbridge CLO 2008-1 Ltd.(3)

    31.9     29.1     11.3 %   31.4     31.4     10.2 %

Pangaea CLO 2007-1 Ltd. 

    12.0     7.8     16.8 %   11.8     7.1     25.0 %
                               

Total bonds

    130.0     73.3     12.7 %   127.7     86.1     18.5 %

Preferred Shares/Income Notes:

                                     

Callidus Debt Partners CLO Fund III, Ltd. 

    20.1     2.2     %   20.1     5.4     %

Callidus Debt Partners CLO Fund IV, Ltd. 

    14.9     4.4     %   14.6     10.6     18.1 %

Callidus Debt Partners CLO Fund V, Ltd. 

    13.5     4.6     7.6 %   13.4     10.3     21.3 %

Callidus Debt Partners CLO Fund VI, Ltd. 

    29.1     4.2     %   28.3     23.1     21.8 %

Callidus Debt Partners CLO Fund VII, Ltd. 

    24.8     5.4     %   24.0     15.4     17.9 %

Callidus MAPS CLO Fund I LLC

    41.2     13.7     %   45.1     27.8     6.5 %

Callidus MAPS CLO Fund II, Ltd. 

    18.1     4.8     3.4 %   18.4     12.6     19.3 %

Dryden XVIII Leveraged Loan 2007 Limited

    23.2     2.4     %   22.1     17.5     20.2 %

Knightsbridge CLO 2007-1 Ltd.(3)

    38.8     22.6     22.8 %   40.9     35.2     17.4 %

Knightsbridge CLO 2008-1 Ltd.(3)

    21.3     20.1     22.5 %   21.3     21.3     16.6 %
                               

Total preferred shares/income notes

    245.0     84.4     12.1 %   248.2     179.2     16.4 %
                               

Total

  $ 375.0   $ 157.7         $ 375.9   $ 265.3        
                               

(1)
The weighted average yield is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective interest yield on the preferred shares/income notes, divided by (b) CLO and CDO assets at value. The yield on these debt and equity securities is included in interest income in the accompanying consolidated statement of operations. The market yield used in the valuation of the CLO and CDO assets may be different than the interest yields shown above.

(2)
These securities are included in private finance subordinated debt.

(3)
These funds are managed by the Company through a wholly-owned subsidiary.

              The initial yields on the cost basis of the CLO preferred shares and income notes are based on the estimated future cash flows expected to be paid to these CLO classes from the underlying collateral assets. As each CLO preferred share or income note ages, the estimated future cash flows are updated based on the estimated performance of the underlying collateral assets, and the respective yield on the cost basis is adjusted as necessary. As future cash flows are subject to uncertainties and contingencies that are difficult to predict and are subject to future events that may alter current assumptions, no assurance can be given that the anticipated yields to maturity will be achieved.

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              The bonds, preferred shares and income notes of the CLOs and CDO in which the Company has invested are junior in priority for payment of interest and principal to the more senior notes issued by the CLOs and CDO. Cash flow from the underlying collateral assets in the CLOs and CDO is generally allocated first to the senior bonds in order of priority. Any remaining cash flow is then generally distributed to the preferred shareholders and income note holders. To the extent there are ratings downgrades, defaults and unrecoverable losses on the underlying collateral assets that result in reduced cash flows, the preferred shares/income notes will bear this loss first and then the subordinated bonds would bear any loss after the preferred shares/income notes. At both September 30, 2009, and December 31, 2008, the face value of the CLO and CDO assets held by the Company was subordinate to as much as 94% of the face value of the securities outstanding in these CLOs and CDO.

              At September 30, 2009, and December 31, 2008, the underlying collateral assets of these CLO and CDO issuances, consisting primarily of senior corporate loans, were issued by 627 issuers and 658 issuers, respectively, and had balances as follows:

($ in millions)
  2009   2008  

Bonds

  $ 232.3   $ 268.3  

Syndicated loans

    4,387.2     4,477.3  

Cash(1)

    107.9     89.6  
           

Total underlying collateral assets at cost(2)

  $ 4,727.4   $ 4,835.2  
           

(1)
Includes undrawn liability amounts.

(2)
At September 30, 2009, and December 31, 2008, the total cost basis of defaulted obligations was $139.6 million and $95.0 million, respectively, or approximately 3.0% and 2.0% respectively, of the total underlying collateral assets.

              Loans and Debt Securities on Non-Accrual Status.    At September 30, 2009, and December 31, 2008, private finance loans and debt securities at value not accruing interest were as follows:

($ in millions)
  2009   2008  

Loans and debt securities

             

Companies more than 25% owned

  $ 194.2   $ 176.1  

Companies 5% to 25% owned

    15.3      

Companies less than 5% owned

    96.3     151.8  
           

Total

  $ 305.8   $ 327.9  
           

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              Industry and Geographic Compositions.    The industry and geographic compositions of the private finance portfolio at value at September 30, 2009, and December 31, 2008, were as follows:

 
  2009   2008  

Industry

             

Business services

    32 %   36 %

Consumer products

    28     24  

Private debt funds

    8     6  

Financial services

    8     5  

CLO/CDO(1)

    6     8  

Consumer services

    5     5  

Industrial products

    3     5  

Retail

    2     5  

Healthcare services

    2     2  

Other

    6     4  
           

Total

    100 %   100 %
           

Geographic Region(2)

             

Mid-Atlantic

    42 %   41 %

Midwest

    30     28  

Southeast

    15     17  

West

    12     13  

Northeast

    1     1  
           

Total

    100 %   100 %
           

(1)
These funds primarily invest in senior corporate loans. Certain of these funds are managed by Callidus Capital, a portfolio company of Allied Capital.

(2)
The geographic region for the private finance portfolio depicts the location of the headquarters for the Company's portfolio companies. The portfolio companies may have a number of other locations in other geographic regions.

              At September 30, 2009, and December 31, 2008, the commercial real estate finance portfolio consisted of the following:

 
  2009   2008  
($ in millions)
  Cost   Value   Yield(1)   Cost   Value   Yield(1)  

Commercial mortgage loans

  $ 54.9   $ 50.5     6.9 % $ 52.5   $ 53.5     7.4 %

Real estate owned

    5.9     6.2           18.2     20.8        

Equity interests

    13.2     11.8           14.8     19.6        
                               

Total

  $ 74.0   $ 68.5         $ 85.5   $ 93.9        
                               

(1)
The weighted average yield on the commercial mortgage loans is computed as the (a) annual stated interest on accruing loans plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans less the annual amortization of origination costs, divided by (b) total interest-bearing investments at value. The weighted average yield is computed as of the balance sheet date.

              Commercial Mortgage Loans and Equity Interests.    The commercial mortgage loan portfolio contains loans that were originated by the Company or were purchased from third-party sellers. At September 30, 2009, and December 31, 2008, approximately 63% and 69% of the Company's commercial mortgage loan portfolio was composed of fixed interest rate loans, respectively, and 37%

F-235



and 31% of the Company's commercial loan portfolio was composed of adjustable interest rate loans, respectively. At September 30, 2009, and December 31, 2008, loans with a value of $9.2 million and $7.7 million, respectively, were not accruing interest. Loans greater than 120 days delinquent generally do not accrue interest.

              Equity interests primarily consist of equity securities issued by privately owned companies that invest in single real estate properties. These equity interests may be subject to certain restrictions on their resale and are generally illiquid. Equity interests generally do not produce a current return, but are generally held in anticipation of potential investment appreciation and ultimate realized gain on sale.

              The property types and the geographic composition securing the commercial real estate finance portfolio at value at September 30, 2009, and December 31, 2008, were as follows:

 
  2009   2008  

Property Type

             

Hospitality

    54 %   52 %

Recreation

    30     22  

Office

    14     15  

Retail

        9  

Other

    2     2  
           

Total

    100 %   100 %
           

Geographic Region

             

Southeast

    46 %   43 %

West

    32     26  

Midwest

    13     22  

Northeast

    9     9  

Mid-Atlantic

         
           

Total

    100 %   100 %
           

              The Company, as a BDC, has invested in illiquid securities including debt and equity securities of portfolio companies, CLO bonds and preferred shares/income notes, CDO bonds and investment funds. The Company's investments may be subject to certain restrictions on resale and generally have no established trading market. The Company values substantially all of its investments at fair value as determined in good faith by the Board of Directors in accordance with the Company's valuation policy and the provisions of the 1940 Act and ASC Topic 820. The Company determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. The Company's valuation policy considers the fact that no ready market exists for substantially all of the securities in which it invests and that fair value for its investments must typically be determined using unobservable inputs.

              ASC Topic 820 establishes a fair value hierarchy that encourages the use of observable inputs, but allows for unobservable inputs when observable inputs do not exist. Inputs are classified into one of three categories:

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              When there are multiple inputs for determining the fair value of an investment, the Company classifies the investment in total based on the lowest level input that is significant to the fair value measurement.

              The Company has $90.0 million in investments in money market and other securities, which the Company has determined are Level 1 assets but are not included in the Company's investment portfolio. Portfolio assets measured at fair value on a recurring basis by level within the fair value hierarchy at September 30, 2009, were as follows:

($ in millions)
  Fair Value
Measurement as
of September 30,
2009
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

Assets at Fair Value:

                         

Portfolio

                         

Private finance:

                         

Loans and debt securities

  $ 1,847.0   $   $   $ 1,847.0  

Preferred shares/income notes of CLOs

    84.4             84.4  

Subordinated certificates in Senior Secured Loan Fund LLC

    165.0             165.0  

Other equity securities

    346.3             346.3  

Commercial real estate finance

    68.5             68.5  
                   

Total portfolio

  $ 2,511.2   $   $   $ 2,511.2  
                   

              The table below sets forth a summary of changes in the Company's assets measured at fair value using level 3 inputs.

 
  Private Finance    
   
 
($ in millions)
  Loans
and Debt
Securities
  Preferred
Shares/
Income Notes
of CLOs
  Subordinated
Certificates in
Senior Secured
Fund LLC
  Other
Equity
Securities
  Commercial
Real Estate
Finance
  Total  

Balance at December 31, 2008

  $ 2,591.8   $ 179.2   $ 125.4   $ 502.7   $ 93.9   $ 3,493.0  

Total gains or losses

                                     

Net realized gains (losses)(1)

    (116.5 )   11.7         (40.9 )   (3.7 )   (149.4 )

Net change in unrealized appreciation or depreciation(2)

    (109.2 )   (91.5 )   (0.2 )   (72.3 )   (13.9 )   (287.1 )

Purchases, issuances, repayments and exits, net(3)

    (519.1 )   (15.0 )   39.8     (43.2 )   (7.8 )   (545.3 )

Transfers in and/or out of level 3

                         
                           

Balance at September 30, 2009

  $ 1,847.0   $ 84.4   $ 165.0   $ 346.3   $ 68.5   $ 2,511.2  
                           

Net unrealized appreciation (depreciation) during the period relating to assets still held at the reporting date(2)

  $ (205.0 ) $ (91.5 ) $ (0.2 ) $ (89.9 ) $ (15.3 ) $ (401.9 )
                           

(1)
Includes net realized gains (losses) (recorded as realized gains or losses in the accompanying consolidated statement of operations), and amortization of discounts and closing points (recorded as interest income in the accompanying consolidated statement of operations).

(2)
Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statement of operations. Net change in unrealized appreciation or depreciation includes net unrealized appreciation (depreciation) resulting from changes in portfolio investment

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(3)
Includes interest and dividend income reinvested through the receipt of a debt or equity security (payment-in-kind income) (recorded as interest and dividend income in the accompanying consolidated statement of operations).

              In addition to managing its own assets, the Company manages certain funds that also invest in the debt and equity securities of primarily private middle market companies in a variety of industries and broadly syndicated senior secured loans. At September 30, 2009, the Company had eight separate funds under its management (together, the "Managed Funds") for which the Company may earn management or other fees for its services. The Company may invest in the equity of these funds, along with other third parties, from which the Company may earn a current return and/or a future incentive allocation.

              In the first quarter of 2009, the Company completed the acquisition of the management contracts of three middle market senior debt CLOs (together, the "Emporia Funds") and certain other related assets for approximately $11 million (subject to post-closing adjustments). The acquired assets are included in other assets in the accompanying consolidated balance sheet and the cost will be amortized over the life of the contracts.

              The assets of the Managed Funds at September 30, 2009 and December 31, 2008, and the Company's management fees as of September 30, 2009, were as follows:

 
  Assets of Managed Funds    
 
($ in millions)
Name of Fund
  September 30,
2009
  December 31,
2008
  Management
Fee(2)
 

Senior Secured Loan Fund LLC(3)

  $ 921.2   $ 789.8     0.375 %

Allied Capital Senior Debt Fund, L.P. 

    351.4     412.9     1.625 %(1)(2)

Knightsbridge CLO 2007-1 Ltd. 

    500.7     500.6     0.600 %

Knightsbridge CLO 2008-1 Ltd. 

    304.6     304.8     0.600 %

Emporia Preferred Funding I, Ltd. 

    419.8         0.625 %(1)

Emporia Preferred Funding II, Ltd. 

    355.7         0.650 %(1)

Emporia Preferred Funding III, Ltd. 

    406.1         0.650 %(1)

AGILE Fund I, LLC

    83.5     99.3     (1)
                 

Total Assets

  $ 3,343.0   $ 2,107.4        
                 

(1)
In addition to the management fees, the Company is entitled to an incentive allocation subject to certain performance benchmarks. There can be no assurance that the incentive allocation will be earned.

(2)
Management fees are stated as a percent of assets except for the Allied Capital Senior Debt Fund, L.P. ("ACSDF") which is stated as a percent of equity capital. The management fee paid by ACSDF was 2.000% at December 31, 2008 and was reduced to 1.625% effective January 1, 2009 for the 2009 calendar year.

(3)
In June 2009, the Unitranche Fund LLC was renamed the Senior Secured Loan Fund LLC. In October 2009, the Company sold its investment, including the outstanding commitments and the

F-238


              A portion of the management fees earned by the Company may be deferred under certain circumstances. Collection of the fees earned may be dependent in part on the performance of the relevant Managed Fund. The Company may pay a portion of management fees it receives to Callidus Capital Corporation, a wholly owned portfolio investment , for services provided to the Allied Capital Senior Debt Fund, L.P., Knightsbridge CLO 2007-1 Ltd., Knightsbridge CLO 2008-1 Ltd. and the Emporia Funds.

              The Company's responsibilities to the Managed Funds may include investment origination, underwriting, and portfolio monitoring services. Each of the Managed Funds may separately invest in the debt or equity of companies in the Company's portfolio, and these investments may be senior, pari passu or junior to the debt and equity investments held by the Company. The Company may or may not participate in investments made by the Managed Funds.

              The Company accounts for the sale of securities to funds with which it has continuing involvement as sales pursuant to ASC Topic 860, when the securities have been legally isolated from the Company, the Company has no ability to restrict or constrain the ability of the Managed Funds to pledge or exchange the transferred securities, and the Company does not have either the entitlement and the obligation to repurchase the securities or the ability to unilaterally cause the Managed Fund to put the securities back to the Company.

              During the nine months ended September 30, 2009, the Company sold assets to certain of its Managed Funds for which the Company received proceeds of $9.7 million and recognized a net realized gain of $6.3 million. During the nine months ended September 30, 2008, the Company sold assets to certain of the Managed Funds, for which the Company received proceeds of $352.7 million, and recognized realized gains of $2.8 million.

              In addition to managing these funds, the Company holds certain investments in the Managed Funds as follows:

 
   
  September 30, 2009   December 31, 2008  
($ in millions)
Name of Fund
  Investment Description   Cost   Value   Cost   Value  

Senior Secured Loan Fund LLC(1)

  Subordinated Certificates and Equity Interests   $ 165.2   $ 165.0   $ 125.4   $ 125.4  

Allied Capital Senior Debt Fund, L.P. 

  Equity interests     31.8     33.0     31.8     31.8  

Knightsbridge CLO 2007-1 Ltd. 

  Class E Notes and Income Notes     57.4     33.8     59.6     50.1  

Knightsbridge CLO 2008-1 Ltd. 

  Class C Notes, Class D Notes, Class E Notes and Income Notes     53.2     49.2     52.7     52.7  

AGILE Fund I, LLC

  Equity Interests     0.7     0.4     0.7     0.5  
                       

Total

      $ 308.3   $ 281.4   $ 270.2   $ 260.5  
                       

(1)
The Company has committed up to a total of $525.0 million of subordinated certificates to the Senior Secured Loan Fund. The Senior Secured Loan Fund will be capitalized as investment transactions are completed. In October 2009, the Company sold its investment, including the outstanding commitments and the provision of management services, in the Senior Secured Loan Fund LLC. See Note 14. Subsequent Events.

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Note 4.   Debt

              At September 30, 2009, and December 31, 2008, the Company had outstanding debt as follows:

 
  2009   2008  
($ in millions)
  Facility
Amount
  Amount
Drawn at par
  Annual
Interest
Cost(1)
  Facility
Amount
  Amount
Drawn at par
  Annual
Interest
Cost(1)
 

Notes payable:

                                     

Privately issued secured notes payable (formerly unsecured)(5)

  $ 841.0   $ 841.0 (6)   13.8 % $ 1,015.0   $ 1,015.0     7.8 %

Publicly issued unsecured notes payable

    745.5     745.5     6.7 %   880.0     880.0     6.7 %
                               

Total notes payable

    1,586.5     1,586.5     10.5 %   1,895.0     1,895.0     7.3 %

Bank secured term debt (former revolver)(4)

    50.0     50.0     17.0 %(2)   632.5     50.0     4.3 %(2)
                               

Total debt

  $ 1,636.5   $ 1,636.5     10.7 %(3) $ 2,527.5   $ 1,945.0     7.7 %(3)
                               

(1)
The weighted average annual interest cost is computed as the (a) annual stated interest on the debt, plus the annual amortization of commitment fees, other facility fees and amortization of debt financing costs and original issue discount that are recognized into interest expense over the contractual life of the respective borrowings, divided by (b) debt outstanding on the balance sheet date.

(2)
The annual interest cost reflects the interest rate payable for borrowings under the revolving line of credit in effect at the balance sheet date. In addition to the current interest payable, there were annual costs of commitment fees, other facility fees and amortization of debt financing costs of $4.3 million at September 30, 2009, and $8.5 million at December 31, 2008.

(3)
The annual interest cost for total debt includes the annual cost of commitment fees, other facility fees and amortization of debt financing costs on the bank term debt regardless of the amount outstanding on the facility as of the balance sheet date. The annual interest cost reflects the facilities in place on the balance sheet date.

(4)
During the three months ended September 30, 2009, the commitments under the facility were reduced to $50.0 million subsequent to the funding of $46.0 million to Ciena securitizations in lieu of draws under letters of credit issued under the facility.

(5)
In the third quarter of 2009, the Company completed the restructuring of its private notes.

(6)
The notes payable on the consolidated balance sheet are shown net of OID of approximately $42.6 million as of September 30, 2009.

              On August 28, 2009, the Company completed a comprehensive restructuring of its private notes (the "Notes") and its bank facility (the "Facility"). Beginning in January 2009, the Company engaged in discussions with the revolving line of credit lenders (the "Lenders") and the private noteholders (the "Noteholders") to seek relief under certain terms of both the Facility and the Notes due to certain covenant defaults. As of December 31, 2008, the Company's asset coverage was less than the 200% then required by the revolving credit facility and the private notes. Asset coverage generally refers to the percentage resulting from assets less accounts payable and other liabilities, divided by total debt.

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              In connection with the restructuring, the Company granted the Noteholders and the Lenders a pari-passu blanket lien on a substantial portion of its assets, including a substantial portion of the assets of the Company's consolidated subsidiaries.

              The financial covenants applicable to the Notes and the Facility were modified as part of the restructuring. The Consolidated Debt to Consolidated Shareholders' Equity covenant and the Capital Maintenance covenant were both eliminated. The Asset Coverage ratio was set at 1.35:1 initially, increasing to 1.4:1 at June 30, 2010 and to 1.55:1 at June 30, 2011, and maintained at that level thereafter. A new covenant, Total Adjusted Assets to Secured Debt, was set at 1.75:1 initially, increasing to 2.0:1 at June 30, 2010 and to 2.25:1 at June 30, 2011, and maintained at that level thereafter. The ratio of Adjusted EBIT to Adjusted Interest Expense was set at 1.05:1 initially, decreasing to 0.95:1 at December 31, 2009, 0.80:1 at March 31, 2010 and 0.75:1 at June 30, 2010. The covenant will then be increased to 0.80:1 on December 31, 2010 and 0.95:1 on December 31, 2011 and maintained at that level thereafter. At September 30, 2009, the Company was in compliance with these financial covenants.

              The Notes and Facility impose certain limitations on the Company's ability to incur additional indebtedness, including precluding the Company from incurring additional indebtedness unless its asset coverage of all outstanding indebtedness is at least 200%. Pursuant to the 1940 Act, the Company is not permitted to issue indebtedness unless immediately after such issuance the Company has asset coverage of all outstanding indebtedness of at least 200%. At September 30, 2009, the Company's asset coverage ratio was 175%, which is less than the 200% requirement. As a result, the Company will not be able to issue additional indebtedness until such time as its asset coverage returns to at least 200%.

              The Company is required to apply 50% of all net cash proceeds from asset sales to the repayment of the Notes and 6% of all net cash proceeds from asset sales to the repayment of the Facility, subject to certain conditions and exclusions. In the case of certain events of default, the Company would be required to apply 100% of all net cash proceeds from asset sales to the repayment of its secured lenders. Under the new agreements, subject to a limit and certain liquidity restrictions, the Company may repurchase its public debt; however, the Company is prohibited from repurchasing its common stock and may not pay dividends in excess of the minimum the Company reasonably believes is required to maintain its tax status as a regulated investment company. In addition, upon the occurrence of a change of control (as defined in the Note Agreement and Credit Agreement), the Noteholders have the right to be prepaid in full and the Company is required to repay in full all amounts outstanding under the Facility.

              The Note Agreement and Credit Agreement provide for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, cross-defaults, bankruptcy events and failure to pay judgments. Certain of these events of default are subject to notice and cure periods or materiality thresholds. Pursuant to the terms of the Notes, the occurrence of an event of default generally permits the holders of more than 50% in principal amount of outstanding Notes to accelerate repayment of all amounts due thereunder. The occurrence of an event of default would generally permit the administrative agent for the lenders under the Facility, or the holders of more than 51% of the aggregate principal debt outstanding under the Facility, to accelerate repayment of all amounts outstanding thereunder. Pursuant to the Notes, during the continuance of an event of default, the rate of interest applicable to the Notes would increase by 200 basis points. Pursuant to the terms of the Facility, during the continuance of an event of default, the applicable spread on any borrowings outstanding under the Facility would increase by 200 basis points.

              In connection with the restructuring, the Company recorded a loss on the extinguishment of debt of $117.5 million. In addition to the $11 million of previously deferred unamortized debt costs associated with the Notes and Facility, the Company incurred and paid costs to the lenders of $146 million and other third party advisory and other fees of approximately $26 million in connection

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with the restructuring. Approximately $20 million of the restructuring costs were deferred and are being amortized into interest expense over the life of the Notes and Facility. In addition, the Company recorded approximately $45 million of original issue discount ("OID") related to the restructuring of the Notes, which is being amortized into interest expense over the life of the Notes. After giving effect to the restructuring and the recording of the loss, the Company estimates that the weighted average interest cost, including amortization of the deferred debt cost and OID, for the Notes is approximately 13.75% and the for Facility is approximately 17%. The loss on extinguishment of debt is comprised of the following:

($ in millions)
   
 

Previously deferred unamortized costs

  $ 11.3  

Fees paid to Noteholders/Lenders

    145.9  

Advisory and other fees paid

    26.0  

Costs deferred and amortizing into interest expense

    (20.3 )

OID recorded and amortizing into interest expense

    (45.4 )
       

Loss on extinguishment of debt

  $ 117.5  
       

              Privately Issued Notes Payable.    The Company had $1,015.0 million of Notes outstanding at June 30, 2009. The Company made principal payments on the Notes at and prior to the closing of the restructuring and had $841.0 million of Notes outstanding following the closing of the restructuring.

              In connection with the restructuring, the existing Notes were exchanged for three new series of Notes containing the following terms:

($ in millions)
  Principal
Amount
  Maturity
Dates
  Annual Stated
Interest Rate
Through
December 31,
2009(1)
  Annual Stated
Interest Rate
Beginning
January 1,
2010(1)
  Annual Stated
Interest Rate
Beginning
January 1,
2011(1)
  Annual Stated
Interest Rate
Beginning
January 1,
2012(1)
 

Series A

  $ 253.8     June 15, 2010     8.50 %   9.25 %   N/A     N/A  

Series B

  $ 253.8     June 15, 2011     9.00 %   9.50 %   9.75 %   N/A  

Series C

  $ 333.5     March 31 &
April 1, 2012
    9.50 %   10.00 %   10.25 %   10.75 %

(1)
The Notes generally require payment of interest quarterly.

              The Company made various cash payments in connection with the restructuring of its Notes. The Company paid an amendment fee at closing of $15.2 million. In addition, the Company paid a make-whole fee of $79.7 million related to a contractual provision in the old Notes. Due to the payment of this make-whole fee, the new Notes have no significant make-whole requirement. The Company also paid a restructuring fee of $50.0 million at closing, which will be applied toward the principal balance of the Notes if the Notes are refinanced in full on or before January 31, 2010.

              Bank Facility.    At June 30, 2009, the Company had an unsecured revolving line of credit that was due to expire on April 11, 2011. The Company's Facility was restructured from a revolving facility to a term facility maturing on November 13, 2010. Total commitments under the Facility were reduced at closing to $96.0 million from $115.0 million prior to closing. At closing, there were $50.0 million of borrowings and $46.0 million of standby letters of credit ("LCs") outstanding under the Facility. The $46.0 million of LCs terminated and/or expired prior to September 30, 2009 and the commitments under the Facility were reduced by a commensurate amount. As a result, the total commitment and outstanding balance was $50.0 million at September 30, 2009.

              Borrowings under the Facility bear interest at a floating rate of interest, subject to a floor. The floating rate spread increases by 0.5% per annum beginning on January 1, 2010 and continuing through

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maturity. At closing, the interest rate on the Facility was 8.5% per annum. The Facility requires the payment of a commitment fee equal to 0.50% per annum of the committed amount. In addition, the Company agreed to pay an amendment fee at closing of $1.0 million, and a restructuring fee payable on January 31, 2010 equal to 1.0% of the outstanding borrowings on such date if the Facility remains outstanding. The Facility generally requires payments of interest no less frequently than quarterly.

              Publicly Issued Unsecured Notes Payable.    At September 30, 2009, the Company had outstanding publicly issued unsecured notes as follows:

($ in millions)
  Amount   Maturity Date  

6.625% Notes due 2011

  $ 319.9     July 15, 2011  

6.000% Notes due 2012

    195.6     April 1, 2012  

6.875% Notes due 2047

    230.0     April 15, 2047  
             

Total

  $ 745.5        
             

              The 6.625% Notes due 2011 and the 6.000% Notes due 2012 require payment of interest only semi-annually, and all principal is due upon maturity. The Company has the option to redeem these notes in whole or in part, together with a redemption premium, as stipulated in the notes. In addition, the Company may purchase these notes in the market at par or at a discount to the extent permitted by the 1940 Act. During the nine months ended September 30, 2009, the Company paid $30.1 million to repurchase certain of the 6.625% Notes due 2011 which had a face value of $80.1 million, and $20.2 million to repurchase certain of the 6.000% Notes due 2012 which had a face value of $54.4 million. After recognizing the remaining unamortized original issue discount associated with the notes repurchased, the Company recognized a net gain on repurchase of debt of $83.5 million for the nine months ended September 30, 2009.

              The 6.875% Notes due 2047 require payment of interest only quarterly, and all principal is due upon maturity. These notes are redeemable in whole or in part at any time or from time to time on or after April 15, 2012, at par and upon the occurrence of certain tax events as stipulated in the notes.

              The Company has certain financial and operating covenants that are required by the publicly issued unsecured notes payable. The Company is not permitted to issue indebtedness unless immediately after such issuance the Company has asset coverage of all outstanding indebtedness of at least 200% as required by the 1940 Act, as amended. At September 30, 2009, the Company's asset coverage ratio was 175%.

              Scheduled Maturities.    Scheduled future maturities of notes payable at September 30, 2009, were as follows:

 
  Amount Maturing at Par  
($ in millions) Year
  Bank Secured
Term Debt
  Privately Issued
Secured Notes
Payable
  Publicly Issued
Unsecured Notes
Payable
  Total  

2009

  $   $   $   $  

2010

    50.0     253.7         303.7  

2011

        253.8     319.9     573.7  

2012

        333.5     195.6     529.1  

2013

                 

Thereafter

            230.0     230.0  
                   

Total

  $ 50.0   $ 841.0   $ 745.5   $ 1,636.5  
                   

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              The Company records debt at cost. The fair value of the Company's outstanding debt was approximately $1.4 billion and $1.4 billion at September 30, 2009 and December 31, 2008, respectively. The fair value of the Company's publicly issued 6.875% Notes due 2047 was determined using the market price of the retail notes at September 30, 2009 and December 31, 2008. The fair value of the Company's other debt was determined based on market interest rates for similar instruments as of the balance sheet dates.

Note 5.   Guarantees and Commitments

              In the ordinary course of business, the Company has issued guarantees and has extended standby letters of credit through financial intermediaries on behalf of certain portfolio companies. All standby letters of credit had been issued through Bank of America, N.A. As of September 30, 2009, and December 31, 2008, the Company had issued guarantees of debt and rental obligations aggregating $9.1 million and $19.2 million, respectively, and had extended standby letters of credit aggregating $0.0 million and $122.3 million, respectively. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations or if the expiration dates of the letters of credit are not extended. The maximum amount of potential future payments was $9.1 million and $141.5 million at September 30, 2009, and December 31, 2008, respectively.

              As of September 30, 2009, the guarantees and standby letters of credit expired as follows:

(in millions)
  Total   2009   2010   2011   2012   2013   After 2013  

Guarantees

  $ 9.1   $ 5.0   $ 3.2   $   $ 0.1   $   $ 0.8  

Standby letters of credit(1)

                             
                               

Total

  $ 9.1   $ 5.0   $ 3.2   $   $ 0.1   $   $ 0.8  
                               

(1)
During the three months ended September 30, 2009, the Company funded $46.0 million in lieu of draws under standby letters of credit and the remaining standby letters of credit expired/terminated. At September 30, 2009, there were no standby letters of credit issued under the facility.

              In the ordinary course of business, the Company enters into agreements with service providers and other parties that may contain provisions for the Company to indemnify and guaranty certain minimum fees to such parties under certain circumstances.

              At September 30, 2009, the Company had outstanding commitments to fund investments totaling $543.9 million, including $515.5 million related to private finance investments and $28.4 million related to commercial real estate finance investments. Total outstanding commitments related to private finance investments included $352.2 million to the Senior Secured Loan Fund LLC. During October 2009, the Company sold its investment, including its outstanding commitments and the provision for management services, in the Senior Secured Loan Fund. See Note 14. Subsequent Events.

Note 6.   Shareholders' Equity

              The Company did not sell any common stock during the nine months ended September 30, 2009. The Company sold 20.5 million shares of its common stock during the nine months ended September 30, 2008, for gross proceeds of $417.1 million. The Company paid $14.6 million in costs, including underwriting fees, for net proceeds of $402.5 million.

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              The Company issued 0.7 million shares of common stock upon the exercise of stock options during the nine months ended September 30, 2009. No stock options were exercised during the nine months ended September 30, 2008.

              The Company has a dividend reinvestment plan, whereby the Company may buy shares of its common stock in the open market or issue new shares in order to satisfy dividend reinvestment requests. If the Company issues new shares, the issue price is equal to the average of the closing sale prices reported for the Company's common stock for the five consecutive trading days immediately prior to the dividend payment date. The Company may not issue new shares below net asset value. During the nine months ended September 30, 2009, the Company did not pay dividends and there was no activity in the dividend reinvestment plan. During the nine months ended September 30, 2008, under the dividend reinvestment plan the Company issued 0.2 million shares at an average price of $19.49 per share, and 0.5 million shares were purchased by a plan agent for shareholders at an average price of $14.43 per share.

Note 7.   Earnings Per Common Share

              Earnings per common share for the three and nine months ended September 30, 2009 and 2008, were as follows:

 
  For the Three
Months Ended
September 30,
  For the Nine
Months Ended
September 30,
 
(in millions, except per share amounts)
  2009   2008   2009   2008  

Net increase (decrease) in net assets resulting from operations

  $ (140.7 ) $ (318.3 ) $ (517.4 ) $ (461.2 )
                   

Weighted average common shares outstanding—basic

    179.1     178.7     178.8     171.1  

Dilutive options outstanding

                 
                   

Weighted average common shares outstanding—diluted

    179.1     178.7     178.8     171.1  
                   

Basic earnings (loss) per common share

  $ (0.79 ) $ (1.78 ) $ (2.89 ) $ (2.70 )
                   

Diluted earnings (loss) per common share

  $ (0.79 ) $ (1.78 ) $ (2.89 ) $ (2.70 )
                   

Note 8.   Employee Compensation Plans

              The Company had an Individual Performance Award plan ("IPA"), and an Individual Performance Bonus plan ("IPB"' each individually a "Plan," or collectively, the "Plans"). These Plans generally were determined annually at the beginning of each year but could be adjusted throughout the year. In 2008, the IPA was paid in cash in two equal installments during the year. Through December 31, 2007, the IPA amounts were contributed into a trust and invested in the Company's common stock. The IPB was distributed in cash to award recipients throughout the year (beginning in February of each respective year) as long as the recipient remained employed by the Company. The Company currently has not established an IPA or IPB for 2009.

              The trusts for the IPA payments were consolidated with the Company's accounts. The common stock was classified as common stock held in deferred compensation trust in the accompanying financial statements and the deferred compensation obligation, which represented the amount owed to the employees, was included in other liabilities. Changes in the value of the Company's common stock held in the deferred compensation trust were not recognized. However, the liability was marked to market with a corresponding charge or credit to employee compensation expense.

              In December 2007, the Company's Board of Directors made a determination that it was in the best interests of the Company to terminate its deferred compensation arrangements. The Board of Directors' decision primarily was in response to increased complexity resulting from changes in the

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regulation of deferred compensation arrangements. The Board of Directors resolved that the accounts under these Plans would be distributed to participants in full on March 18, 2008, the termination and distribution date, or as soon as was reasonably practicable thereafter, in accordance with the provisions of each of these Plans.

              The accounts under the deferred compensation arrangements totaled $52.5 million at December 31, 2007. The balances on the termination date were distributed to participants in March 2008 subsequent to the termination date in accordance with the transition rule for payment elections under Section 409A of the Code. Distributions from the plans were made in cash or shares of the Company's common stock, net of required withholding taxes.

              The IPA and IPB expenses are included in employee expenses and for the three and nine months ended September 30, 2009 and 2008, were as follows:

 
  For the Three
Months Ended
September 30,
  For the Nine
Months Ended
September 30,
 
($ in millions)
  2009   2008   2009   2008  

IPA

  $   $ 2.0   $   $ 6.6  

IPA mark to market expense (benefit)

                (4.1 )
                   

Total IPA expense

  $   $ 2.0   $   $ 2.5  
                   

Total IPB expense

  $   $ 2.4   $   $ 6.8  
                   

Note 9.   Stock Option Plan

              The purpose of the stock option plan ("Option Plan") is to provide officers and non-officer directors of the Company with additional incentives. Options are exercisable at a price equal to the fair market value of the shares on the day the option is granted. Each option states the period or periods of time within which the option may be exercised by the optionee, which may not exceed ten years from the date the option is granted. The options granted to officers generally vest ratably over up to a three year period. Options granted to non-officer directors vest on the grant date.

              All rights to exercise options terminate 60 days after an optionee ceases to be (i) a non-officer director, (ii) both an officer and a director, if such optionee serves in both capacities, or (iii) an officer (if such officer is not also a director) of the Company for any cause other than death or total and permanent disability. In the event of a change of control of the Company, all outstanding options will become fully vested and exercisable as of the change of control.

              At September 30, 2009, and December 31, 2008, there were 37.2 million shares authorized under the Option Plan and the number of shares available to be granted under the Option Plan was 3.8 million and 9.5 million, respectively.

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              Information with respect to options granted, exercised and forfeited under the Option Plan for the nine months ended September 30, 2009, was as follows:

(in millions, except per share amounts)
  Shares   Weighted
Average
Exercise Price
Per Share
  Weighted
Average
Contractual
Remaining
Term (Years)
  Aggregate
Intrinsic
Value at
September 30,
2009(1)
 

Options outstanding at January 1, 2009

    19.7   $ 26.56              

Granted

    11.5   $ 0.88              

Exercised

    (0.7 ) $ 0.73              

Forfeited

    (5.8 ) $ 21.65              
                         

Options outstanding at September 30, 2009

    24.7   $ 16.48     5.10   $ 21.3  
                         

Exercisable at September 30, 2009(2)

    15.2   $ 22.25     4.53   $ 6.8  
                         

Exercisable and expected to be exercisable at September 30, 2009(3)

    23.3   $ 16.77     5.05   $ 19.7  
                         

(1)
Represents the difference between the market value of the options at September 30, 2009, and the cost for the option holders to exercise the options.

(2)
Represents vested options.

(3)
The amount of options expected to be exercisable at September 30, 2009, is calculated based on an estimate of expected forfeitures.

              During the nine months ended September 30, 2008, 7.7 million options were granted, no options were exercised and 4.5 million options were forfeited. The fair value of the options vested during the nine months ended September 30, 2008 was $13.5 million.

Note 10. Dividends and Distributions and Taxes

              At December 31, 2008, the Company met its dividend distribution requirements for the 2008 tax year and therefore did not have excess taxable income available for distribution to shareholders in 2009. The Company's Board of Directors has not declared any dividends in 2009. The Company's Board of Directors declared and the Company paid a dividend of $0.65 per common share for the first, second and third quarters of 2008, totaling $340.4 million.

              The Company generally will be required to pay an excise tax equal to 4% of the amount by which 98% of the Company's annual taxable income exceeds the distributions for the year. The Company records an excise tax based on the Company's estimated excess taxable income for the period. Such estimates may change from period to period. The Company did not record an excise tax for the three and nine months ended September 30, 2009. The Company recorded an excise tax of $0.9 million and $5.1 million for the three and nine months ended September 30, 2008, respectively.

              In certain circumstances, the Company is restricted in its ability to pay dividends. Each of the Company's Notes and the Company's Facility contain provisions that limit the amount of dividends the Company can pay. In addition, pursuant to the 1940 Act, the Company may be precluded from declaring dividends or other distributions to its shareholders unless the Company's asset coverage of senior securities is at least 200%.

              The Company had cumulative deferred taxable income related to installment sale gains of approximately $218.9 million as of December 31, 2008. These gains have been recognized for financial reporting purposes in the respective years they were realized, but are generally deferred for tax purposes until the notes or other amounts received from the sale of the related investments are

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collected in cash. A substantial portion of these installment gains as of December 31, 2008 will be recognized for tax purposes in 2009 as certain notes received from the sale of the related investments have been sold.

              The Company's undistributed book earnings of $184.7 million as of December 31, 2008 resulted from undistributed ordinary income and long-term capital gains. The difference between undistributed book earnings at the end of the year and taxable income carried over from the current year into the next year relates to a variety of timing and permanent differences in the recognition of income and expenses for book and tax purposes.

              The Company's consolidated subsidiary, AC Corp, is subject to federal and state income taxes. For the three months ended September 30, 2009 and 2008, AC Corp's income tax expense was $1.9 million and $1.2 million, respectively, and for the nine months ended September 30, 2009 and 2008, income tax expense was $4.2 million and $3.0 million, respectively. For the nine months ended September 30, 2009, paid in capital was decreased by $3.1 million primarily for the reduction of the deferred tax asset related to stock options that expired unexercised.

Note 11. Supplemental Disclosure of Cash Flow Information

              The Company paid interest of $140.8 million and $95.9 million, respectively, for the nine months ended September 30, 2009 and 2008. The Company paid income taxes, including excise taxes (net of refunds), of $5.5 million and $13.0 million the nine months ended September 30, 2009 and 2008, respectively.

              Non-cash operating activities for the nine months ended September 30, 2009 and 2008, totaled $71.4 million and $107.7 million, respectively. Non-cash operating activities included the exchange of existing debt securities and accrued interest for new debt and equity securities.

              Non-cash financing activities included the issuance of common stock in lieu of cash distributions totaling $3.8 million for the nine months ended September 30, 2008.

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Note 12. Financial Highlights

 
  At and for the
Nine Months Ended
September 30,
   
 
 
  At and for the
Year Ended
December 31,
2008
 
 
  2009(1)   2008  

Per Common Share Data

                   

Net asset value, beginning of period

  $ 9.62   $ 17.54   $ 17.54  
               

Net investment income(2)

    0.31     1.04     1.23  

Net realized gains (losses)(2)(3)

    (0.89 )   0.28     (0.75 )
               

Net investment income plus net realized gains (losses)(2)

    (0.58 )   1.32     0.48  

Net change in unrealized appreciation (depreciation)(2)(3)

    (2.13 )   (4.02 )   (6.49 )

Gain on repurchase of debt

    0.47          

Loss on extinguishment of debt

    (0.65 )        
               

Net increase (decrease) in net assets resulting from operations(2)

    (2.89 )   (2.70 )   (6.01 )
               

Net decrease in net assets from shareholder distributions

        (1.95 )   (2.60 )

Net increase (decrease) in net assets from capital share transactions(2)

    (0.03 )   0.62     0.69  
               

Net asset value, end of period

  $ 6.70   $ 13.51   $ 9.62  
               

Market value, end of period

  $ 3.07   $ 10.80   $ 2.69  

Total return(4)

    14.1 %   (43.3 )%   (82.5 )%

Ratios and Supplemental Data

                   

($ and shares in millions, except per share amounts)

                   

Ending net assets

  $ 1,201.3   $ 2,413.4   $ 1,718.4  

Common shares outstanding at end of period

    179.4     178.7     178.7  

Diluted weighted average common shares outstanding

    178.8     171.1     173.0  

Employee, employee stock option and administrative expenses/average net assets(5)

    4.32 %   3.80 %   5.47 %

Total operating expenses/average net assets(5)(6)

    13.69 %   7.85 %   11.39 %

Income tax expense (benefit), including excise tax/average net assets(5)

    0.30 %   0.30 %   0.10 %

Net investment income/average net assets(5)

    3.93 %   6.59 %   8.47 %

Net increase (decrease) in net assets resulting from operations/average net assets(5)

    (36.76 )%   (16.99 )%   (41.34 )%

Portfolio turnover rate(5)

    4.12 %   19.38 %   24.00 %

Average debt outstanding

  $ 1,833.3   $ 2,072.8   $ 2,091.6  

Average debt per share(2)

  $ 10.25   $ 12.12   $ 12.09  

(1)
The results for the nine months ended September 30, 2009, are not necessarily indicative of the operating results to be expected for the full year.

(2)
Based on diluted weighted average number of common shares outstanding for the period.

(3)
Net realized gains (losses) and net change in unrealized appreciation or depreciation can fluctuate significantly from period to period. As a result, quarterly comparisons may not be meaningful.

(4)
Total return assumes the reinvestment of all dividends paid, if any, for the periods presented.

(5)
The ratios for the nine months ended September 30, 2009 and 2008, do not represent annualized results.

(6)
Includes 0.20% for the effect of the impairment of long-lived asset during the nine months ended September 30, 2009.

F-249


Note 13. Litigation

              On June 23, 2004, the Company was notified by the SEC that the SEC was conducting an informal investigation of the Company. The investigation related to the valuation of securities in the Company's private finance portfolio and other matters. On June 20, 2007, the Company announced that it entered into a settlement with the SEC that resolved the SEC's informal investigation. As part of the settlement and without admitting or denying the SEC's allegations, the Company agreed to the entry of an administrative order. In the order the SEC alleged that, between June 30, 2001, and March 31, 2003, the Company did not maintain books, records and accounts which, in reasonable detail, supported or accurately and fairly reflected valuations of certain securities in the Company's private finance portfolio and, as a result, did not meet certain recordkeeping and internal controls provisions of the federal securities laws. In the administrative order, the SEC ordered the Company to continue to maintain certain of its current valuation-related controls. Specifically, during and following the two-year period of the order the Company has: (1) continued to employ a Chief Valuation Officer, or a similarly structured officer-level employee, to oversee its quarterly valuation processes; and (2) continued to employ third-party valuation consultants to assist in its quarterly valuation processes.

              On December 22, 2004, the Company received letters from the U.S. Attorney for the District of Columbia requesting the preservation and production of information regarding the Company and Business Loan Express, LLC (currently known as Ciena Capital LLC) in connection with a criminal investigation relating to matters similar to those investigated by and settled with the SEC as discussed above. The Company produced materials in response to the requests from the U.S. Attorney's office and certain current and former employees were interviewed by the U.S. Attorney's Office. The Company has voluntarily cooperated with the investigation.

              In late December 2006, the Company received a subpoena from the U.S. Attorney for the District of Columbia requesting, among other things, the production of records regarding the use of private investigators by the Company or its agents. The Board established a committee, which was advised by its own counsel, to review this matter. In the course of gathering documents responsive to the subpoena, the Company became aware that an agent of the Company obtained what were represented to be telephone records of David Einhorn and which purport to be records of calls from Greenlight Capital during a period of time in 2005. Also, while the Company was gathering documents responsive to the subpoena, allegations were made that the Company's management had authorized the acquisition of these records and that management was subsequently advised that these records had been obtained. The Company's management has stated that these allegations are not true. The Company has cooperated fully with the inquiry by the U.S. Attorney's Office.

              On February 26, 2007, Dana Ross filed a class action complaint in the U.S. District Court for the District of Columbia in which she alleges that Allied Capital Corporation and certain members of management violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Thereafter, the court appointed new lead counsel and approved new lead plaintiffs. On July 30, 2007, plaintiffs served an amended complaint. Plaintiffs claim that, between November 7, 2005, and January 22, 2007, Allied Capital either failed to disclose or misrepresented information about its portfolio company, Business Loan Express, LLC. Plaintiffs seek unspecified compensatory and other damages, as well as other relief. The Company believes the lawsuit is without merit, and intends to defend the lawsuit vigorously. On September 13, 2007, the Company filed a motion to dismiss the lawsuit. A hearing was held on the motion to dismiss in April 2009. The motion is pending.

              As of November 6, 2009, the Company is aware of a putative class action and shareholder derivative complaint as well as an additional shareholder derivative complaint filed against the Company, its Board of Directors and Ares Capital Corporation. Both complaints allege that the Company's Board of Directors failed to discharge adequately its fiduciary duties to shareholders by failing to adequately value the Company's shares and ensure that its shareholders received adequate

F-250



consideration in a proposed sale of Allied Capital to Ares Capital Corporation, that the proposed merger between the Company and Ares Capital is the product of a flawed sales process, that the Company's directors and officers breached their fiduciary duties by agreeing to a structure that was not designed to maximize the value of Allied's shares, and that Ares Capital aided and abetted the alleged breach of fiduciary duty. The plaintiffs demand, among other things, a preliminary and permanent injunction enjoining the sale and rescinding the transaction or any part thereof that has been implemented. The Company believes that each of the lawsuits is without merit, and it intends to defend each of these lawsuits vigorously.

              In addition, the Company is party to certain lawsuits in the normal course of business. Furthermore, third parties may try to seek to impose liability on the Company in connection with the activities of its portfolio companies. For a discussion of civil investigations being conducted regarding the lending practice of Ciena Capital LLC, a portfolio company of the Company, see "Note 3, Portfolio—Ciena Capital LLC."

              While the outcome of any of the open legal proceedings described above cannot at this time be predicted with certainty, the Company does not expect these matters will materially affect its financial condition or results of operations.

Note 14. Subsequent Events

              In accordance with ASC Topic 855, the Company has evaluated events subsequent to September 30, 2009, and through the issuance of these consolidated financial statements, which occurred on November 6, 2009.

              On October 26, 2009, the Company, entered into an Agreement and Plan of Merger (the "Merger Agreement") with Ares Capital Corporation, a Maryland corporation ("Ares Capital"), and ARCC Odyssey Corp., a Maryland corporation and wholly-owned subsidiary of Ares Capital ("Merger Sub"). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Allied Capital, with Allied Capital as the surviving company (the "Merger"). Immediately following the Merger, Allied Capital will merge with and into Ares Capital.

              Upon consummation of the Merger, each share of common stock, par value $0.0001 per share, of Allied Capital issued and outstanding immediately prior to the effective time of the Merger will be converted into and become exchangeable for 0.325 common shares, par value $0.001 per share, of Ares Capital. Based on the number of shares of Allied Capital common stock outstanding on the date of the Merger Agreement and not including the effect of outstanding in-the-money options, this will result in approximately 58.3 million Ares Capital shares being exchanged for approximately 179.4 million outstanding Allied Capital shares, subject to adjustment in certain limited circumstances.

              Following consummation of the transactions contemplated by the Merger Agreement, Ares Capital's Board of Directors will continue as directors of Ares Capital. However, Ares Capital's Board of Directors will be increased by at least one member and Ares Capital will submit the name of one member of Allied Capital's current Board of Directors for consideration to Ares Capital's Nominating and Governance Committee to fill the vacancy.

              The Merger Agreement contains (a) customary representations and warranties of Allied Capital and Ares Capital, including, among others: corporate organization, capitalization, corporate authority and absence of conflicts, third party and governmental consents and approvals, reports and regulatory matters, financial statements, compliance with law and legal proceedings, absence of certain changes, taxes, employee matters, intellectual property, insurance, investment assets and certain contracts, (b) covenants of Allied Capital and Ares Capital to conduct their respective businesses in the

F-251



ordinary course until the Merger is completed and (c) covenants of Allied Capital and Ares Capital not to take certain actions during this interim period.

              Among other things, Allied Capital has agreed to, and will cause its affiliates, consolidated subsidiaries, and its and each of their respective officers, directors, managers, employees and other advisors, representatives and agents to, immediately cease and cause to be terminated all discussions and negotiations with respect to a "Takeover Proposal" (as defined in the Merger Agreement) from a third party and not to directly or indirectly solicit or take any other action (including providing information) with the intent to solicit any inquiry, proposal or offer with respect to a Takeover Proposal.

              However, if Allied Capital receives a bona fide unsolicited Takeover Proposal from a third party, and its Board of Directors determines in good faith, after consultation with reputable outside legal counsel and financial advisers experienced in such matters, that failure to consider such proposal would breach the duties of the directors under applicable law, and the Takeover Proposal constitutes or is reasonably likely to result in a "Superior Proposal" (as defined in the Merger Agreement), Allied Capital may engage in discussions and negotiations with such third party so long as certain notice and other procedural requirements are satisfied. In addition, subject to certain procedural requirements (including the ability of Ares Capital to revise its offer) and the payment of a $30 million termination fee, Allied Capital may terminate the Merger Agreement and enter into an agreement with a third party who makes a Superior Proposal.

              The representations and warranties of each party set forth in the Merger Agreement (a) have been qualified by confidential disclosures made to the other party in connection with the Merger Agreement, (b) will not survive consummation of the Merger and cannot be the basis for any claims under the Merger Agreement by the other party after the Merger is consummated, (c) are qualified in certain circumstances by a materiality standard which may differ from what may be viewed as material by investors, (d) were made only as of the date of the Merger Agreement or such other date as is specified in the Merger Agreement, and (e) may have been included in the Merger Agreement for the purpose of allocating risk between Allied Capital and Ares Capital rather than establishing matters as facts.

              Consummation of the Merger, which is currently anticipated to occur by the end of the first quarter of 2010, is subject to certain conditions, including, among others, Allied Capital stockholder approval, Ares Capital stockholder approval, required regulatory approvals (including expiration of the waiting period under the Hart-Scott-Rodino Act), receipt of certain Ares Capital and Allied Capital lender consents and other customary closing conditions.

              The Merger Agreement also contains certain termination rights for Allied Capital and Ares Capital and provides that, in connection with the termination of the Merger Agreement under specified circumstances, Allied Capital may be required to pay Ares Capital a termination fee of $30 million ($15 million if Allied Capital stockholders do not approve the Merger) and Ares Capital may be required to pay Allied Capital a termination fee of $30 million.

              In a separate transaction on October 30, 2009, the Company sold its interests, including its outstanding commitments and the provision of management services, in its Senior Secured Loan Fund LLC (the "SL Fund," formerly known as the Unitranche Fund) to Ares Capital for $165 million in cash. At September 30, 2009, the SL Fund held "unitranche loans" totaling approximately $921 million. In addition, from September 30, 2009 through November 2, 2009, the Company has collected additional cash proceeds totaling approximately $30 million and has identified approximately $200 million of assets for potential future sale. The Company has also paid down an additional $94 million of private debt since September 30, 2009 and has cash and money market and other securities of $273 million as of November 2, 2009.

F-252



Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Allied Capital Corporation:

              We have reviewed the accompanying consolidated balance sheet of Allied Capital Corporation and subsidiaries (the Company), including the consolidated statement of investments, as of September 30, 2009, the related consolidated statements of operations for the three- and nine-month periods ended September 30, 2009 and 2008, and the consolidated statements of changes in net assets and cash flows and the financial highlights (included in Note 12) for the nine-month periods ended September 30, 2009 and 2008. These consolidated financial statements and financial highlights are the responsibility of the Company's management.

              We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

              Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements and financial highlights referred to above for them to be in conformity with U.S. generally accepted accounting principles.

              We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Allied Capital Corporation and subsidiaries, including the consolidated statement of investments, as of December 31, 2008, and the related consolidated statements of operations, changes in net assets and cash flows (not presented herein), and the financial highlights, for the year then ended; and in our report dated March 2, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet including the consolidated statement of investments as of December 31, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

SIGNATURE

Washington, D.C.
November 6, 2009

F-253



Schedule 12-14

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES

(in thousands)

 
   
  Amount of Interest
or Dividends
   
   
   
   
 
PRIVATE FINANCE
Portfolio Company
  Investment(1)   Credited
to Income(6)
  Other(2)   December 31,
2008
Value
  Gross
Additions(3)
  Gross
Reductions(4)
  September 30,
2009
Value
 

Companies More Than 25% Owned

                                         

AGILE Fund I, LLC

 

Equity Interests

             
$

497
 
$

34
 
$

(114

)

$

417
 
 

(Private Equity Fund)

                                         

AllBridge Financial, LLC

 

Senior Loan

 
$

21
         
   
1,311
   
   
1,311
 
 

(Asset Management)

  Equity Interests                 10,960     6,926     (2,363 )   15,523  

Allied Capital Senior Debt Fund, L.P. 

 

Limited Partnership

               
31,800
   
1,244
   
   
33,044
 
 

(Private Debt Fund)

  Interests                                      

Avborne, Inc. 

 

Preferred Stock

               
942
   
   
(38

)
 
904
 
 

(Business Services)

  Common Stock                              

Avborne Heavy Maintenance, Inc. 

 

Common Stock

               
   
   
   
 
 

(Business Services)

                                         

Aviation Properties Corporation

 

Common Stock

               
   
   
   
 
 

(Business Services)

                                         

Border Foods, Inc. 

 

Senior Loan

   
4,162
         
33,027
   
2,637
   
(788

)
 
34,876
 
 

(Consumer Products)

  Preferred Stock                 11,851     4,734         16,585  

  Common Stock                              

Calder Capital Partners, LLC

 

Senior Loan(5)

               
953
   
147
   
   
1,100
 
 

(Asset Management)

  Equity Interests                              

Callidus Capital Corporation

 

Subordinated Debt

   
2,321
         
16,068
   
4,872
   
(5,775

)
 
15,165
 
 

(Asset Management)

  Common Stock                 34,377         (34,377 )    

Ciena Capital LLC

 

Senior Loan(5)

               
104,883
   
   
(2,651

)
 
102,232
 
 

(Financial Services)

  Class B Equity                                      

  Interests                     3,504     (3,504 )    

  Class C Equity                                      

  Interests                              

CitiPostal Inc. 

 

Senior Loan

   
23
         
681
   
2
   
   
683
 
 

(Business Services)

  Unitranche Debt     4,734           51,548     424     (971 )   51,001  

  Subordinated Debt     1,198           9,114     1,151         10,265  

  Common Stock                 8,616         (7,492 )   1,124  

Coverall North America, Inc. 

 

Unitranche Debt

   
2,911
         
31,948
   
25
   
(408

)
 
31,565
 
 

(Business Services)

  Subordinated Debt     646           5,549     4         5,553  

  Common Stock                 17,968     3,293         21,261  

CR Holding, Inc. 

 

Subordinated Debt(5)

               
17,360
   
1,316
   
(8,405

)
 
10,271
 
 

(Consumer Products)

  Common Stock                              

Crescent Equity Corp. 

 

Senior Loan

   
33
         
433
   
   
   
433
 
 

(Business Services)

  Subordinated Debt(5)     58   $ 166     18,614     83     (14,494 )   4,203  

  Common Stock                 4,580     2,165     (6,745 )    

Direct Capital Corporation

 

Senior Loan(5)

               
   
8,573
   
   
8,573
 
 

(Financial Services)

  Subordinated Debt(5)                 13,530         (6,391 )   7,139  

  Common Stock                              

Financial Pacific Company

 

Subordinated Debt

   
8,084
         
62,189
   
30
   
(20,802

)
 
41,417
 
 

(Financial Services)

  Preferred Stock     10                        

  Common Stock                              

ForeSite Towers, LLC

 

Equity Interest

               
889
   
   
(889

)
 
 
 

(Tower Leasing)

                                         

Global Communications, LLC

 

Senior Loan

               
1,335
   
   
(1,335

)
 
 
 

(Business Services)

                                         

Hot Light Brands, Inc. 

 

Senior Loan(5)

               
13,678
   
50
   
(3,257

)
 
10,471
 
 

(Retail)

  Common Stock                              

F-254


 
   
  Amount of Interest
or Dividends
   
   
   
   
 
PRIVATE FINANCE
Portfolio Company
  Investment(1)   Credited
to Income(6)
  Other(2)   December 31,
2008
Value
  Gross
Additions(3)
  Gross
Reductions(4)
  September 30,
2009
Value
 

Hot Stuff Foods, LLC

 

Senior Loan

  $ 1,526         $ 42,378   $ 11,219   $ (8,180 ) $ 45,417  
 

(Consumer Products)

  Subordinated Debt(5)                     49,801         49,801  

  Common Stock                              

Huddle House, Inc. 

 

Subordinated Debt

   
4,918
         
57,067
   
962
   
(38,535

)
 
19,494
 
 

(Retail)

  Common Stock                 20,922         (13,271 )   7,651  

IAT Equity, LLC and Affiliates

 

Subordinated Debt

   
410
         
6,000
   
   
   
6,000
 
 

d/b/a Industrial Air Tool

  Equity Interests                 8,860     1,088         9,948  
 

(Industrial Products)

                                         

Impact Innovations Group, LLC

 

Equity Interests

               
321
   
1
   
   
322
 
 

(Business Services)

  in Affiliate                                      

Insight Pharmaceuticals Corporation

 

Subordinated Debt

 
$

5,619
         
63,359
   
8,960
   
(20,221

)
 
52,098
 
 

(Consumer Products)

  Preferred Stock                 4,068     20,932     (25,000 )    

  Common Stock                     34,088     (23,669 )   10,419  

Jakel, Inc. 

 

Subordinated Debt(5)

               
374
   
   
   
374
 
 

(Industrial Products)

                                         

Knightsbridge CLO 2007-1 Ltd. 

 

Class E Notes

   
1,442
         
14,866
   
   
(3,706

)
 
11,160
 
 

(CLO)

  Income Notes     2,838           35,214     2,837     (15,411 )   22,640  

Knightsbridge CLO 2008-1 Ltd. 

 

Class C Notes

   
842
         
12,800
   
   
(554

)
 
12,246
 
 

(CLO)

  Class D Notes     587           8,000         (920 )   7,080  

  Class E Notes     1,126           10,573     508     (1,283 )   9,798  

  Income Notes     2,924           21,315     2,924     (4,127 )   20,112  

MHF Logistical Solutions, Inc. 

 

Subordinated Debt

               
   
49,633
   
(49,633

)
 
 
 

(Business Services)

  Preferred Stock                              

  Common Stock                     20,942     (20,942 )    

MVL Group, Inc. 

 

Senior Loan

   
2,433
         
30,663
   
70
   
(5,477

)
 
25,256
 
 

(Business Services)

  Subordinated Debt     3,842           40,994     42,123     (47,096 )   36,021  

  Subordinated Debt(5)                 86     144     (230 )    

  Common Stock                              

Old Orchard Brands, LLC

 

Subordinated Debt

   
917
         
18,882
   
262
   
(19,144

)
 
 
 

(Consumer Products)

  Equity Interests                 27,763         (27,763 )    

Penn Detroit Diesel Allison, LLC

 

Subordinated Debt

   
2,767
         
37,869
   
578
   
(38,447

)
 
 
 

(Business Services)

  Equity Interests                 21,100     1,262     (8,492 )   13,870  

Senior Secured Loan Fund LLC

 

Subordinated

   
11,782
 
$

7,548
   
125,423
   
47,373
   
(7,796

)
 
165,000
 
 

(Private Debt Fund)

  Certificates
Equity Interests
                1         (1 )    

Service Champ, Inc. 

 

Subordinated Debt

   
3,235
         
26,984
   
531
   
   
27,515
 
 

(Business Services)

  Common Stock                 21,156     7,165         28,321  

Stag-Parkway, Inc. 

 

Subordinated Debt

   
1,362
         
   
19,001
   
(1

)
 
19,000
 
 

(Business Services)

  Unitranche Debt     170           17,962     418     (18,380 )    

  Common Stock                 6,968     391         7,359  

Startec Equity, LLC

 

Equity Interests

               
332
   
   
(332

)
 
 
 

(Telecommunications)

                                         

Worldwide Express Operations, LLC

 

Subordinated Debt

         
38
   
2,032
   
694
   
(2,726

)
 
 
 

(Business Services)

  Equity Interests                     11,384     (11,384 )    

  Warrants                     144     (144 )    
                                       

Total companies more than 25% owned

                  $ 1,187,722               $ 1,032,018  
                                       

Companies 5% to 25% Owned

                                         

10th Street, LLC

 

Subordinated Debt

 
$

2,148
       
$

21,439
 
$

676
 
$

(15

)

$

22,100
 
 

(Business Services)

  Equity Interests                 975         (490 )   485  

  Option                 25             25  

Advantage Sales & Marketing, Inc. 

 

Subordinated Debt

   
2,286
         
135,000
   
   
(135,000

)
 
 
 

(Business Services)

  Equity Interests                 5,000         (5,000 )    

Air Medical Group Holdings LLC

 

Senior Loan

   
100
         
3,139
   
13,947
   
(12,630

)
 
4,456
 
 

(Healthcare Services)

  Equity Interests                 10,800     9,200         20,000  

Alpine ESP Holdings, Inc. 

 

Preferred Stock

               
   
701
   
(701

)
 
 
 

(Business Services)

  Common Stock                     13     (13 )    

Amerex Group, LLC

 

Subordinated Debt

   
1,993
         
8,784
   
5
   
(8,789

)
 
 
 

(Consumer Products)

  Equity Interests     6,167           9,932         (9,932 )    

F-255


 
   
  Amount of Interest
or Dividends
   
   
   
   
 
PRIVATE FINANCE
Portfolio Company
  Investment(1)   Credited
to Income(6)
  Other(2)   December 31,
2008
Value
  Gross
Additions(3)
  Gross
Reductions(4)
  September 30,
2009
Value
 

BB&T Capital Partners/Windsor

 

Equity Interests

              $ 11,063   $   $ (1,054 ) $ 10,009  
 

Mezzanine Fund, LLC

                                         
 

(Private Equity Fund)

                                         

Becker Underwood, Inc. 

 

Subordinated Debt

 
$

425
         
25,502
   
216
   
(25,718

)
 
 
 

(Industrial Products)

  Common Stock                 2,267     2,748     (5,015 )    

Drew Foam Companies, Inc. 

 

Preferred Stock

               
512
   
111
   
(623

)
 
 
 

(Business Services)

  Common Stock                     6     (6 )    

Driven Brands, Inc. 

 

Subordinated Debt

   
11,021
         
83,698
   
5,780
   
(3,080

)
 
86,398
 
 

(Consumer Services)

  Common Stock                 4,855         (2,355 )   2,500  

Hilden America, Inc. 

 

Common Stock

               
76
   
378
   
(454

)
 
 
 

(Consumer Products)

                                         

Lydall Transport, Ltd. 

 

Equity Interests

               
345
   
87
   
(432

)
 
 
 

(Business Services)

                                         

Multi-Ad Services, Inc. 

 

Unitranche Debt

   
234
         
2,941
   
56
   
(509

)
 
2,488
 
 

(Business Services)

  Equity Interests                 1,782         (576 )   1,206  

Pendum Acquisition, Inc. 

 

Common Stock

               
   
   
   
 
 

(Business Services)

                                         

Postle Aluminum Company, LLC

 

Senior Loan(5)

               
   
34,876
   
(19,568

)
 
15,308
 
 

(Industrial Products)

  Subordinated Debt(5)                     23,868     (23,868 )    

  Equity Interest                              

Progressive International Corporation

 

Preferred Stock

               
1,125
   
4,722
   
   
5,847
 
 

(Consumer Products)

  Common Stock                 4,600         (4,447 )   153  

  Warrants                              

Regency Healthcare Group, LLC

 

Senior Loan

   
44
         
   
4,001
   
(4,001

)
 
 
 

(Healthcare Services)

  Unitranche Debt     309           10,825     31     (10,856 )    

  Equity Interests                 2,050         (209 )   1,841  

SGT India Private Limited

 

Common Stock

               
   
21
   
(21

)
 
 
 

(Business Services)

                                         

Soteria Imaging Services, LLC

 

Subordinated Debt

   
396
         
4,054
   
100
   
   
4,154
 
 

(Healthcare Services)

  Equity Interests                 1,971         (688 )   1,283  

Triax Holdings, LLC

 

Subordinated Debt

               
   
10,772
   
(10,772

)
 
 
 

(Consumer Products)

  Equity Interests                     16,528     (16,528 )    

Universal Environmental Services, LLC

 

Equity Interests

               
   
   
   
 
 

(Business Services)

                                         
                                       

Total companies 5% to 25% owned

                  $ 352,760               $ 178,253  
                                       

This schedule should be read in conjunction with the Company's consolidated financial statements, including the consolidated statement of investments and Note 3 to the consolidated financial statements. Note 3 includes additional information regarding activities in the private finance portfolio.

(1)
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. The principal amount for loans and debt securities and the number of shares of common stock and preferred stock is shown in the consolidated statement of investments as of September 30, 2009.

(2)
Other includes interest, dividend, or other income which was applied to the principal of the investment and therefore reduced the total investment. These reductions are also included in the Gross Reductions for the investment, as applicable.

(3)
Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and closing fees, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation.

(4)
Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation.

(5)
Loan or debt security is on non-accrual status at September 30, 2009, and is therefore considered non-income producing. Loans or debt securities on non-accrual status at the end of the period may or may not have been on non-accrual status for the full period.

(6)
Represents the total amount of interest or dividends credited to income for the portion of the year an investment was included in the companies more than 25% owned or companies 5% to 25% owned categories, respectively.

F-256


21,000,000 Shares

LOGO

Common Stock



PROSPECTUS SUPPLEMENT



BofA Merrill Lynch

J.P. Morgan

SunTrust Robinson Humphrey

Wells Fargo Securities

BB&T Capital Markets

BMO Capital Markets

Deutsche Bank Securities

Morgan Stanley

UBS Investment Bank

January 26, 2010




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FORWARD-LOOKING STATEMENTS
THE COMPANY
FEES AND EXPENSES
USE OF PROCEEDS
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
CAPITALIZATION
UNDERWRITING
LEGAL MATTERS
PROSPECTUS SUMMARY
THE COMPANY
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SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA OF ARES CAPITAL
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UNAUDITED PRO FORMA PER SHARE DATA
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FORWARD-LOOKING STATEMENTS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Ares Capital Corporation and Subsidiaries Pro Forma Condensed Consolidated Balance Sheet As of September 30, 2009 Unaudited (in thousands, except share and per share data)
Ares Capital Corporation and Subsidiaries Pro Forma Condensed Consolidated Statement of Operations For the Nine Months Ended September 30, 2009 Unaudited (in thousands, except share and per share data)
Ares Capital Corporation and Subsidiaries Pro Forma Condensed Consolidated Statement of Operations For the Year Ended December 31, 2008 Unaudited (in thousands, except share and per share data)
Ares Capital Corporation and Subsidiaries Pro Forma Schedule of Investments Unaudited As of September 30, 2009 (Dollar Amounts in Thousands)
Ares Capital Corporation and Subsidiaries Notes to Pro Forma Condensed Consolidated Financial Statements Unaudited (In thousands, except share and per share data unless otherwise stated)
USE OF PROCEEDS
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
RATIOS OF EARNINGS TO FIXED CHARGES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SENIOR SECURITIES (dollar amounts in thousands, except per share data)
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PENDING ALLIED ACQUISITION
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ARES CAPITAL AND SUBSIDIARIES PORTFOLIO COMPANIES As of September 30, 2009 (dollar amounts in thousands)
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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DETERMINATION OF NET ASSET VALUE
DIVIDEND REINVESTMENT PLAN
CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
DESCRIPTION OF SECURITIES
DESCRIPTION OF OUR CAPITAL STOCK
SALES OF COMMON STOCK BELOW NET ASSET VALUE
ISSUANCE OF WARRANTS OR SECURITIES TO SUBSCRIBE FOR OR CONVERTIBLE INTO SHARES OF OUR COMMON STOCK
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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
AVAILABLE INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
ARES CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollar amounts in thousands, except per share data)
ARES CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (dollar amounts in thousands, except per share data)
ARES CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTS As of December 31, 2008 (dollar amounts in thousands, except per unit data)
ARES CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTS As of December 31, 2007 (dollar amounts in thousands, except per unit data)
ARES CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (dollar amounts in thousands, except per share data)
ARES CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (dollar amounts in thousands)
ARES CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2008 (dollar amounts in thousands, except per share data and as otherwise indicated)
ARES CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (dollar amounts in thousands, except per share data)
ARES CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (dollar amounts in thousands, except per share data)
ARES CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTS As of September 30, 2009 (unaudited) (dollar amounts in thousands, except per unit data)
ARES CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTS As of December 31, 2008 (dollar amounts in thousands, except per unit data)
ARES CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 2009 (unaudited) (dollar amounts in thousands, except per share data)
ARES CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (dollar amounts in thousands)
ARES CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of September 30, 2009 (unaudited) (dollar amounts in thousands, except per share data and as otherwise indicated)
Report of Independent Registered Public Accounting Firm
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in thousands, except per share amounts)
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share amounts)
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (in thousands, except per share amounts)
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INVESTMENTS December 31, 2008 (in thousands, except number of shares)
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INVESTMENTS December 31, 2007 (in thousands, except number of shares)
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in thousands, except per share amounts)
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share amounts)
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (in thousands, except per share amounts)
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INVESTMENTS September 30, 2009 (unaudited) (in thousands, except number of shares)
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INVESTMENTS December 31, 2008 (in thousands, except number of shares)
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES (in thousands)