UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
|
|
|
For the quarterly period ended June 30, 2006 | ||
| ||
OR | ||
| ||
o |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
For the transition period to
Commission File No. 000-50697
ARES CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
Maryland |
| 33-1089684 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification Number) |
280 Park Avenue, 22nd Floor, New York, NY 10017
(Address of principal executive office) (Zip Code)
(212) 750-7300
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
| Outstanding at August 8, 2006 |
Common stock, $0.001 par value |
| 48,988,504 |
ARES CAPITAL CORPORATION
INDEX
1
PART I — FINANCIAL INFORMATION
ARES CAPITAL CORPORATION AND SUBSIDIARIES
|
| As of |
| ||||
|
| June 30, 2006 |
| December 31, 2005 |
| ||
|
| (unaudited) |
|
|
| ||
ASSETS |
|
|
|
|
| ||
|
|
|
|
|
| ||
Investments at fair value (amortized cost of $888,483,712 and $581,351,865, respectively) |
|
|
|
|
| ||
Non-control/Non-affiliate investments |
| $ | 714,898,704 |
| $ | 515,184,991 |
|
Affiliate investments |
| 163,261,927 |
| 70,783,384 |
| ||
Total investments at fair value |
| 878,160,631 |
| 585,968,375 |
| ||
Cash and cash equivalents |
| 44,844,697 |
| 16,613,334 |
| ||
Receivable for open trades |
| 6,962,236 |
| 1,581,752 |
| ||
Interest receivable |
| 7,854,038 |
| 5,828,098 |
| ||
Other assets |
| 4,608,731 |
| 3,653,585 |
| ||
|
|
|
|
|
| ||
Total assets |
| $ | 942,430,333 |
| $ | 613,645,144 |
|
|
|
|
|
|
| ||
LIABILITIES |
|
|
|
|
| ||
|
|
|
|
|
| ||
Credit facilities payable |
| $ | 345,200,000 |
| $ | 18,000,000 |
|
Reimbursed underwriting costs payable to the Investment Adviser |
| — |
| 2,475,000 |
| ||
Dividend payable |
| — |
| 12,889,225 |
| ||
Payable for open trades |
| — |
| 5,500,000 |
| ||
Accounts payable and accrued expenses |
| 7,092,656 |
| 1,222,678 |
| ||
Management and incentive fees payable |
| 10,047,596 |
| 3,478,034 |
| ||
Interest and facility fees payable |
| 3,105,947 |
| 313,930 |
| ||
Interest payable to the Investment Adviser |
| — |
| 154,078 |
| ||
|
|
|
|
|
| ||
Total liabilities |
| 365,446,199 |
| 44,032,945 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies (Note 6) |
|
|
|
|
| ||
|
|
|
|
|
| ||
STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Common stock, par value $.001 per share, 100,000,000 common shares authorized, 38,207,254 and 37,909,484 common shares issued and outstanding, respectively |
| 38,208 |
| 37,910 |
| ||
Capital in excess of par value |
| 564,192,430 |
| 559,192,554 |
| ||
Accumulated net realized gain on sale of investments |
| 23,076,577 |
| 5,765,225 |
| ||
Net unrealized (depreciation) appreciation on investments |
| (10,323,081 | ) | 4,616,510 |
| ||
|
|
|
|
|
| ||
Total stockholders’ equity |
| 576,984,134 |
| 569,612,199 |
| ||
|
|
|
|
|
| ||
Total liabilities and stockholders’ equity |
| $ | 942,430,333 |
| $ | 613,645,144 |
|
|
|
|
|
|
| ||
NET ASSETS PER SHARE |
| $ | 15.10 |
| $ | 15.03 |
|
See accompanying notes to consolidated financial statements.
2
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of June 30, 2006 (unaudited)
Company {1} |
| Industry |
| Investment |
| Interest {13} |
| Initial |
| Amortized |
| Fair Value |
| Fair Value |
| Percentage of |
|
| |
Healthcare - Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
American Renal Associates, Inc. |
| Dialysis provider |
| Senior secured loan ($3,049,180 par due 12/2010) |
| 9.57% (Libor+ 4.00%/S) |
| 12/14/05 |
| 3,049,180 |
| 3,049,180 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($196,721 par due 12/2010) |
| 9.45% (Libor + 4.00%/Q) |
| 12/14/05 |
| 196,721 |
| 196,721 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($180,328 par due 12/2010) |
| 9.45% (Libor + 4.00%/Q) |
| 12/14/05 |
| 180,328 |
| 180,328 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($5,836,066 par due 12/2011) |
| 10.07% (Libor + 4.50%/S) |
| 12/14/05 |
| 5,836,066 |
| 5,836,066 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($50,820 par due 12/2011) |
| 11.25% (Base Rate+ 3.00%/Q) |
| 12/14/05 |
| 50,820 |
| 50,820 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($655,738 par due 12/2011) |
| 12.57% (Libor + 7.00%/Q) |
| 12/14/05 |
| 655,738 |
| 655,738 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($6,557,377 par due 12/2011) |
| 14.25% (Base Rate + 6.00%/Q) |
| 12/14/05 |
| 6,557,377 |
| 6,557,377 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Capella Healthcare, Inc. |
| Acute care hospital operator |
| Junior secured loan ($31,000,000 par due 11/2013) |
| 11.24% (Libor + 6.00%/Q) |
| 12/1/05 |
| 31,000,000 |
| 31,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
DSI Renal, Inc. |
| Dialysis provider |
| Senior subordinated note ($72,336,000 par due 4/2014) |
| 12.00% Cash, 2.00% PIK |
| 4/4/06 |
| 72,336,000 |
| 72,336,000 |
| $ | 1.00{3 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
OnCURE Medical Corp. |
| Radiation oncology care provider |
| Senior secured revolving loan ($100,000 par due 2/2011) |
| 8.69% (Libor + 3.50%/Q) |
| 2/14/06 |
| 100,000 |
| 100,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($200,000 par due 2/2011) |
| 8.50% (Libor + 3.50%/S) |
| 2/14/06 |
| 200,000 |
| 200,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($4,964,286 par due 2/2012) |
| 9.00% (Libor + 4.00%/S) |
| 2/14/06 |
| 4,964,286 |
| 4,964,286 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($35,714 par due 2/2012) |
| 10.75% (Base Rate + 2.50%/S) |
| 2/14/06 |
| 35,714 |
| 35,714 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Junior secured loan ($15,080,088 par due 8/2012) |
| 12.00% cash, 1.50% PIK |
| 2/14/06 |
| 15,080,088 |
| 15,080,088 |
| $ | 1.00{3 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
PHNS, Inc. |
| Information technology and business process outsourcing |
| Senior subordinated loan ($16,000,000 par due 11/2011) |
| 13.50% cash, 2.50% PIK |
| 10/29/04 |
| 15,797,902 |
| 16,000,000 |
| $ | 1.00{3 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Triad Laboratory Alliance, LLC |
| Laboratory services |
| Senior subordinated loan ($9,796,981 par due 12/2012) |
| 12.00% cash, 1.75% PIK |
| 12/21/05 |
| 9,796,981 |
| 9,796,981 |
| $ | 1.00{3 | } |
|
|
|
|
|
|
| Senior secured loan ($2,985,000 par due 12/2011) |
| 8.23% (Libor + 3.25%/Q) |
| 12/21/05 |
| 2,985,000 |
| 2,985,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 168,822,201 |
| 169,024,299 |
|
|
| 29.29 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Arrow Group Industries, Inc. |
| Residential and outdoor shed manufacturer |
| Senior secured loan ($6,000,000 par due 4/2010) |
| 10.50% (Libor + 5.00%/M) |
| 3/28/05 |
| 6,039,265 |
| 6,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($6,000,000 par due 10/2010) |
| 15.00% (Libor + 9.50%/Q) |
| 3/28/05 |
| 6,000,000 |
| 6,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Emerald Performance Materials, LLC |
| Polymers and performance materials manufacturer |
| Senior secured loan ($10,526,316 par due 5/2011) |
| 9.52% (Libor + 4.25%/Q) |
| 5/16/06 |
| 10,526,316 |
| 10,526,316 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($5,263,158 par due 5/2011) |
| 11.27% (Libor + 6.00%/Q) |
| 5/16/06 |
| 5,263,158 |
| 5,263,158 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($4,210,526 par due 5/2011) |
| 13.00% |
| 5/16/06 |
| 4,210,526 |
| 4,210,526 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Qualitor, Inc. |
| Automotive aftermarket components |
| Senior secured loan ($1,970,000 par due 12/2011) |
| 9.50% (Libor + 4.00%/Q) |
| 12/29/04 |
| 1,970,000 |
| 1,970,000 |
| $ | 1.00{2 | } |
|
|
|
|
| supplier |
| Junior secured loan ($5,000,000 par due 6/2012) |
| 12.50% (Libor + 7.00%/Q) |
| 12/29/04 |
| 5,000,000 |
| 5,000,000 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Professional Paint, Inc. |
| Paint manufacturer |
| Junior secured loan ($16,500,000 par due 5/2013) |
| 11.38% (Libor + 5.75%/S) |
| 5/25/06 |
| 16,500,000 |
| 16,500,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reflexite Corporation {9} |
| Developer and manufacturer of high visibility reflective products |
| Senior subordinated loan ($10,458,604 par due 12/2011) |
| 11.00% cash, 3.00% PIK |
| 12/30/04 |
| 10,458,604 |
| 10,458,604 |
| $ | 1.00{2}{3 | } |
|
|
|
|
|
|
| Common Stock (1,729,627 shares) |
|
|
| 3/28/06 |
| 25,682,891 |
| 25,682,891 |
| $ | 14.85{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Universal Trailer Corporation {5} |
| Livestock and specialty trailer manufacturer |
| Common stock (50,000 shares) |
|
|
| 10/8/04 |
| 6,424,645 |
| 3,113,351 |
| $ | 62.27{4 | } |
|
|
|
|
|
|
| Warrants to purchase 22,208 shares |
|
|
| 10/8/04 |
| 1,505,776 |
| 1,382,826 |
| $ | 62.27{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Varel Holdings, Inc. |
| Drill bit manufacturer |
| Senior secured loan ($6,643,750 par due 12/2010) |
| 9.15% (Libor + 4.00%/B) |
| 5/18/05 |
| 6,643,750 |
| 6,643,750 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior secured loan ($1,956,673 par due 12/2010) |
| 9.13% (Libor + 4.00%/Q) |
| 5/18/05 |
| 1,956,673 |
| 1,956,673 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior secured loan ($3,333,333 par due 12/2011) |
| 13.32% (Libor + 8.00%/Q) |
| 5/18/05 |
| 3,333,333 |
| 3,333,333 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior secured revolving loan ($333,333 par due 10/2010) |
| 10.50% (Base Rate + 2.25%/D) |
| 5/18/05 |
| 333,333 |
| 333,333 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Preferred stock (33,245 shares) |
|
|
| 5/18/05 |
| 1,088,431 |
| 1,088,431 |
| $ | 32.74{3 | } |
|
|
|
|
|
|
| Common stock (30,451 shares) |
|
|
| 5/18/05 |
| 3,045 |
| 1,011,569 |
| $ | 33.22{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 112,939,746 |
| 110,474,761 |
|
|
| 19.15 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Containers-Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Captive Plastics, Inc. |
| Plastics container manufacturer |
| Junior secured loan ($16,000,000 par due 2/2012) |
| 12.34% (Libor + 7.25%/Q) |
| 12/19/05 |
| 16,000,000 |
| 16,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Industrial Container Services, LLC {7} |
| Industrial container manufacturer, reconditioner and servicer |
| Senior secured loan ($28,588,315 par due 9/2011) |
| 11.92% (Libor + 6.50%/Q) |
| 9/30/05 |
| 28,588,315 |
| 28,588,315 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($10,000,000 par due 9/2011) |
| 11.92% (Libor + 6.50%/Q) |
| 6/21/06 |
| 10,000,000 |
| 10,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($826,087 par due 9/2011) |
| 9.79% (Libor + 4.50%/M) |
| 9/30/05 |
| 826,087 |
| 826,087 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($826,087 par due 9/2011) |
| 9.75% (Libor + 4.50%/M) |
| 9/30/05 |
| 826,087 |
| 826,087 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($4,130,435 par due 9/2011) |
| 9.78% (Libor + 4.50%/M) |
| 9/30/05 |
| 4,130,435 |
| 4,130,435 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($826,087 par due 9/2011) |
| 11.25% (Base Rate + 3.00%/Q) |
| 9/30/05 |
| 826,087 |
| 826,087 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($826,087 par due 9/2011) |
| 11.25% (Base Rate + 3.00%/Q) |
| 9/30/05 |
| 826,087 |
| 826,087 |
| $ | 1.00 |
|
|
|
|
3
|
|
|
| Senior secured revolving loan ($1,652,174 par due 9/2011) |
| 9.85% (Libor + 4.50%/M) | 9/30/05 |
| 1,652,174 |
| 1,652,174 |
| $1.00 |
|
|
|
|
|
|
|
| Common stock (1,800,000 shares) |
|
| 9/29/05 |
| 1,800,000 |
| 1,800,000 |
| $1.00{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LabelCorp Holdings, Inc. |
| Consumer product labels manufacturer |
| Senior subordinated notes ($9,180,470 par due 9/2012) |
| 12.00% cash, 3.00% PIK | 3/16/06 |
| 9,180,470 |
| 9,180,470 |
| $1.00{3 | } |
|
|
|
|
|
|
|
|
|
|
|
| 74,655,742 |
| 74,655,742 |
|
|
| 12.94 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Printing, Publishing and Broadcasting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canon Communications LLC |
| Print publications services |
| Junior secured loan ($23,775,000 par due 11/2011) |
| 12.37% (Libor + 6.75%/S) | 5/25/05 |
| 23,775,000 |
| 23,775,000 |
| $1.00{2 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily Candy, Inc. {10} |
| Internet publication provider |
| Senior secured loan ($24,200,000 par due 5/2009) |
| 10.62% (Libor + 5.00%/S) | 5/25/06 |
| 24,200,000 |
| 24,200,000 |
| $1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($800,000 par due 5/2009) |
| 10.50% (Libor + 5.00%/Q) | 5/25/06 |
| 800,000 |
| 800,000 |
| $1.00 |
|
|
|
|
|
|
|
| Common stock (1,250,000 shares) |
|
| 5/25/06 |
| 2,375,000 |
| 2,375,000 |
| $1.90 |
|
|
|
|
|
|
|
| Warrants to purchase 1,381,578 shares |
|
| 5/25/06 |
| 2,625,000 |
| 2,625,000 |
| $1.90{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National Print Group, Inc. |
| Printing management services |
| Senior secured revolving loan ($365,259 par due 3/2012) |
| 10.75% (Base Rate + 2.50%/D) | 3/2/06 |
| 365,259 |
| 365,259 |
| $1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($859,062 par due 3/2012) |
| 10.75% (Base Rate + 2.50%/D) | 3/2/06 |
| 859,062 |
| 859,062 |
| $1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($11,230,435 par due 3/2012) |
| 9.00% (Libor + 3.50%/Q) | 3/2/06 |
| 11,230,435 |
| 11,230,435 |
| $1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($2,739,130 par due 8/2012) |
| 12.32% (Libor + 7.00%/Q) | 3/2/06 |
| 2,739,130 |
| 2,739,130 |
| $1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($2,282,609 par due 3/2012) |
| 12.17% (Libor + 7.00%/B) | 3/2/06 |
| 2,282,609 |
| 2,282,609 |
| $1.00 |
|
|
|
|
|
|
|
| Preferred stock (9,344 shares) |
|
| 3/2/06 |
| 2,000,000 |
| 2,000,000 |
| $214.04{4 | } |
|
|
|
|
|
|
|
|
|
|
|
| 73,251,495 |
| 73,251,495 |
|
|
| 12.70 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services - Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified Collection Services, Inc. |
| Collections services |
| Senior secured loan ($5,242,026 par due 2/2011) |
| 8.78% (Libor + 4.00%/S) | 2/2/05 |
| 5,242,026 |
| 5,242,026 |
| $1.00{2 | } |
|
|
|
|
|
|
| Senior secured loan ($8,500,000 par due 8/2011) |
| 10.89% (Libor + 6.00%/S) | 2/2/05 |
| 8,500,000 |
| 8,500,000 |
| $1.00{2 | } |
|
|
|
|
|
|
| Preferred stock (14,927 shares) |
|
| 5/18/06 |
| 169,123 |
| 169,123 |
| $11.33{4 | } |
|
|
|
|
|
|
| Common stock (114,004 shares) |
|
| 2/2/05 |
| 295,270 |
| 295,270 |
| $2.59{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Event Rentals, Inc. |
| Party rental services |
| Senior secured loan ($2,277,902 par due 11/2011) |
| 10.77% (Libor+ 5.25%/S) | 11/17/05 |
| 2,277,902 |
| 2,277,902 |
| $1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($5,005,581 par due 11/2011) |
| 10.69% (Libor + 5.25%/S) | 11/17/05 |
| 5,005,581 |
| 5,005,581 |
| $1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($2,466,518 par due 11/2011) |
| 10.80% (Libor + 5.25%/S) | 11/17/05 |
| 2,466,518 |
| 2,466,518 |
| $1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($85,227 par due 11/2011) |
| 12.50% (Base Rate + 4.25%/D) | 11/17/05 |
| 85,227 |
| 85,227 |
| $1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($7,968,750 par due 11/2011) |
| 10.77% (Libor + 5.25%/S) | 11/17/05 |
| 7,968,750 |
| 7,968,750 |
| $1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GCA Services Group, Inc. |
| Custodial services |
| Senior subordinated loan ($33,236,748 par due 1/2010) |
| 12.00% cash, 3.00% PIK | 7/25/05 |
| 33,236,748 |
| 33,236,748 |
| $1.00{3 | } |
|
|
|
|
|
|
|
|
|
|
|
| 65,247,145 |
| 65,247,145 |
|
|
| 11.31 | % |
|
Consumer Products - Non-Durable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Making Memories Wholesale, Inc. {6} |
| Scrapbooking branded products manufacturer |
| Senior secured loan ($7,995,833 par due 3/2011) |
| 10.00% (Libor + 4.50%/Q) | 5/5/05 |
| 7,995,833 |
| 7,995,833 |
| $1.00{2 | } |
|
|
|
|
|
|
| Senior subordinated loan ($10,100,808 par due 5/2012) |
| 12.50% cash, 2.00% PIK | 5/5/05 |
| 10,100,808 |
| 10,100,808 |
| $1.00{3 | } |
|
|
|
|
|
|
| Preferred stock (3,500 shares) |
|
| 5/5/05 |
| 3,758,800 |
| 1,320,000 |
| $377.14{3 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shoes for Crews, LLC |
| Safety footwear and slip-related mats manufacturer |
| Senior secured loan ($1,370,173 par due 7/2010) |
| 8.87% (Libor + 3.25%/S) | 10/8/04 |
| 1,378,236 |
| 1,378,236 |
| $1.00{2 | } |
|
|
|
|
|
|
| Senior secured loan ($60,747 par due 7/2010) |
| 8.75% (Libor + 3.25%/Q) | 10/8/04 |
| 61,104 |
| 61,104 |
| $1.00{2 | } |
|
|
|
|
|
|
| Senior secured revolving loan ($1,333,333 par due 7/2010) |
| 10.25% (Base Rate + 2.00%/Q) | 6/16/06 |
| 1,333,333 |
| 1,333,333 |
| $1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tumi Holdings, Inc. |
| Branded luggage designer, marketer and distributor |
| Senior secured loan ($2,500,000 par due 12/2012) |
| 8.25% (Libor + 2.75%/Q) | 5/24/05 |
| 2,500,000 |
| 2,500,000 |
| $1.00{2 | } |
|
|
|
|
|
|
| Senior secured loan ($5,000,000 par due 12/2013) |
| 8.75% (Libor + 3.25%/Q) | 3/14/05 |
| 5,000,000 |
| 5,000,000 |
| $1.00{2 | } |
|
|
|
|
|
|
| Senior subordinated loan ($13,339,711.06 par due 12/2014) |
| 16.50% (Libor + 6.00% cash, 5.00% PIK/Q) | 3/14/05 |
| 13,339,711 |
| 13,339,711 |
| $1.00{2}{3 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UCG Paper Crafts, Inc. |
| Scrapbooking materials manufacturer |
| Senior secured loan ($2,000,000 par due 2/2013) |
| 8.60% (Libor + 3.25%/M) | 2/23/06 |
| 2,000,000 |
| 2,000,000 |
| $1.00 |
|
|
|
|
|
|
|
| Junior secured loan ($12,962,500 par due 2/2013) |
| 12.84% (Libor + 7.50%/M) | 2/23/06 |
| 12,962,500 |
| 12,962,500 |
| $1.00 |
|
|
|
|
|
|
|
| Junior secured loan ($32,500 par due 2/2013) |
| 14.75% (Base Rate + 6.50%/D) | 2/23/06 |
| 32,500 |
| 32,500 |
| $1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
| 60,462,825 |
| 58,024,025 |
|
|
| 10.06 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equinox SMU Partners LLC and |
| Medical school operator |
| Senior secured revolving loan ($3,232,342 par due 12/2010) |
| 12.75% (Base Rate + 5.00%/Q) | 1/25/06 |
| 3,232,342 |
| 3,232,342 |
| $1.00 |
|
|
|
|
SMU Acquisition Corp. {8} |
|
|
| Senior secured revolving loan ($3,000,000 par due 12/2010) |
| 11.06% (Libor + 6.00%/S) | 1/25/06 |
| 3,000,000 |
| 3,000,000 |
| $1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($10,500,000 par due 12/2010) |
| 11.07% (Libor + 6.00%/S) | 1/25/06 |
| 10,500,000 |
| 10,500,000 |
| $1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($3,000,000 par due 12/2010) |
| 11.07% (Libor + 6.00%/S) | 1/25/06 |
| 3,000,000 |
| 3,000,000 |
| $1.00 |
|
|
|
|
|
|
|
| Limited liability company membership interest (17.39% interest) |
|
| 1/25/06 |
| 4,000,000 |
| 4,000,000 |
| {4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lakeland Finance, LLC |
| Private school operator |
| Senior secured note ($33,000,000 par due 12/2012) |
| 11.50% | 12/13/05 |
| 33,000,000 |
| 33,000,000 |
| $1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
| 56,732,342 |
| 56,732,342 |
|
|
| 9.83 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mactec, Inc. |
| Engineering and environmental |
| Common stock (186 shares) |
|
| 11/3/04 |
| — |
| — |
| $—{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wastequip, Inc. |
| Waste management equipment manufacturer |
| Junior secured loan ($27,000,000 par due 7/2012) |
| 11.00% (Libor + 5.50%/Q) | 8/4/05 |
| 27,000,000 |
| 27,000,000 |
| $1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WCA Waste Systems, Inc. |
| Waste management services |
| Junior secured loan ($25,000,000 par due 10/2011) |
| 14.25% (Base Rate + 6.00%/D) | 4/25/05 |
| 25,000,000 |
| 25,000,000 |
| $1.00{2 | } |
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 52,000,000 |
| 52,000,000 |
|
|
| 9.01 | % |
| |
Consumer Products - Durable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
AWTP, LLC |
| Water treatment services |
| Junior secured loan ($13,600,000 par due 12/2012) |
| 13.00% (Libor + 7.50%/Q) | 12/21/05 |
| 13,600,000 |
| 13,600,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Berkline/Benchcraft Holdings LLC |
| Furniture manufacturer and distributor |
| Junior secured loan ($5,000,000 par due 5/2012) |
| 15.00% (Libor + 10.00%/Q) | 11/3/04 |
| 5,000,000 |
| 3,250,000 |
| $ | 0.65{2 | } |
|
|
|
|
|
|
| Preferred stock (2,536 shares) |
|
| 10/8/04 |
| 1,046,343 |
| — |
| $ | —{4 | } |
|
|
|
|
|
|
| Warrants to purchase 483,020 shares |
|
| 10/8/04 |
| 2,752,559 |
| — |
| $ | —{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Singer Sewing Company |
| Sewing machine manufacturer |
| Senior secured revolving loan ($583,333 par due 9/2010) |
| 9.20% (Libor + 4.00%/M) | 2/9/06 |
| 583,333 |
| 583,333 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($250,000 par due 9/2010) |
| 9.32% (Libor + 4.00%/M) | 2/9/06 |
| 250,000 |
| 250,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($166,667 par due 9/2010) |
| 9.25% (Libor + 4.00%/M) | 2/9/06 |
| 166,667 |
| 166,667 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($166,667 par due 9/2010) |
| 9.14% (Libor + 4.00%/M) | 2/9/06 |
| 166,667 |
| 166,667 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($250,000 par due 9/2010) |
| 9.18% (Libor + 4.00%/M) | 2/9/06 |
| 250,000 |
| 250,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($18,000,000 par due 9/2010) |
| 11.18% (Libor + 6.00%/M) | 2/9/06 |
| 18,000,000 |
| 18,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 41,815,569 |
| 36,266,667 |
|
|
| 6.29 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Business Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Investor Group Services, LLC |
| Financial services |
| Senior secured loan ($1,500,000 par due 6/2011) |
| 12.00% | 6/22/06 |
| 1,500,000 |
| 1,500,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Limited liability company membership interest (10.00% interest) |
|
| 6/22/06 |
| — |
| — |
| {4 | } |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Miller Heiman, Inc. |
| Sales consulting services |
| Senior secured loan ($3,768,072 par due 6/2010) |
| 8.85% (Libor + 3.50%/M) | 6/20/05 |
| 3,768,072 |
| 3,768,072 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior secured loan ($4,037,985 par due 6/2012) |
| 9.50% (Libor + 4.00%/Q) | 6/20/05 |
| 4,037,985 |
| 4,037,985 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
MR Processing Holding Corp. |
| Bankruptcy and foreclosure processing services |
| Senior subordinated note ($20,103,333 par due 2/2013) |
| 12.00% Cash, 2.00% PIK | 3/23/06 |
| 20,103,333 |
| 20,103,333 |
| $ | 1.00{3 | } |
|
|
|
|
|
|
| Senior secured loan ($1,995,000 par due 2/2012) |
| 8.63% (Libor + 3.50%/Q) | 3/28/06 |
| 1,995,000 |
| 1,995,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Preferred stock (30,000 shares) |
|
| 4/11/06 |
| 3,000,000 |
| 3,000,000 |
| $ | 100.00{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 34,404,390 |
| 34,404,390 | ` |
|
| 5.96 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Restaurants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
ADF Capital, Inc. & ADF Restaurant Group, LLC |
| Restaurant owner and operator |
| Senior secured revolving loan ($1,200,000 par due 6/2013) |
| 13.75% (Base Rate + 5.50%/D) | 6/1/06 |
| 1,200,000 |
| 1,200,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($23,000,000 par due 6/2013) |
| 13.75% (Base Rate + 5.50%/D) | 6/1/06 |
| 23,000,000 |
| 23,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Warrants to purchase 0.882353 units |
|
| 6/1/06 |
| 3,000,000 |
| 3,000,000 |
| $ | 3,399,999.77{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 27,200,000 |
| 27,200,000 |
|
|
| 4.71 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Aerospace & Defense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
ILC Industries, Inc. |
| Industrial products provider |
| Junior secured loan ($15,000,000 par due 8/2012) |
| 11.50% | 6/27/06 |
| 15,000,000 |
| 15,000,000 |
| $ | 1.00{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Thermal Solutions LLC and TSI Group, Inc. |
| Thermal management and electronics packaging manufacturer |
| Senior secured loan ($3,241,875 par due 3/2012) |
| 9.07% (Libor + 4.00%/Q) | 3/28/05 |
| 3,241,875 |
| 3,241,875 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior secured loan ($1,703,947 par due 3/2011) |
| 8.57% (Libor + 3.50%/Q) | 3/28/05 |
| 1,703,947 |
| 1,703,947 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior subordinated notes ($3,083,967 par due 9/2012) |
| 11.50% cash, 2.75% PIK | 3/28/05 |
| 3,091,646 |
| 3,083,967 |
| $ | 1.00{2}{3 | } |
|
|
|
|
|
|
| Senior subordinated notes ($2,517,188 par due 3/2013) |
| 11.50% cash, 2.50% PIK | 3/21/06 |
| 2,517,188 |
| 2,517,188 |
| $ | 1.00{2}{3 | } |
|
|
|
|
|
|
| Preferred stock (53,900 shares) |
|
| 3/28/05 |
| 539,000 |
| 539,000 |
| $ | 10.00{4 | } |
|
|
|
|
|
|
| Common stock (1,100,000 shares) |
|
| 3/28/05 |
| 11,000 |
| 11,000 |
| $ | 0.01{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 26,104,656 |
| 26,096,977 |
|
|
| 4.52 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Broadcasting and Cable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Patriot Media & Communications CNJ, LLC |
| Cable services |
| Junior secured loan ($5,000,000 par due 10/2013) |
| 10.15% (Libor + 5.00%/M) | 10/6/05 |
| 5,000,000 |
| 5,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Pappas Telecasting Incorporated |
| Television broadcasting |
| Senior secured loan ($20,254,608 par due 2/2010) |
| 14.29% (Libor + 4.00% cash, 5.00% PIK/Q) | 3/1/06 |
| 20,254,608 |
| 20,254,608 |
| $ | 1.00{3 | } |
|
|
|
|
|
|
| Senior secured loan ($86,335 par due 2/2010) |
| 14.25% (Libor + 4.00% cash, 5.00% PIK/Q) | 3/1/06 |
| 86,335 |
| 86,335 |
| $ | 1.00{3 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 25,340,943 |
| 25,340,943 |
|
|
| 4.39 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Computers and Electronics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Extensity |
| Software manufacturer |
| Junior secured loan ($10,000,000 par due 9/2011) |
| 12.51% (Libor + 7.25%/B) | 3/13/06 |
| 10,000,000 |
| 10,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
RedPrairie Corporation |
| Software manufacturer |
| Junior secured loan ($8,500,000 par due 5/2010) |
| 12.84% (Libor + 7.75%/B) | 2/21/06 |
| 8,500,000 |
| 8,500,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 18,500,000 |
| 18,500,000 |
|
|
| 3.21 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cargo Transport |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
The Kenan Advantage Group, Inc. |
| Fuel transportation provider |
| Senior subordinated notes ($9,038,381 par due 12/2013) |
| 9.50% cash, 3.50% PIK | 12/15/05 |
| 9,038,381 |
| 9,038,381 |
| $ | 1.00{3 | } |
|
|
|
|
|
|
| Senior secured loan ($2,487,500 par due 12/2011) |
| 8.50% (Libor + 3.00%/Q) | 12/15/05 |
| 2,487,500 |
| 2,487,500 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Preferred stock (10,984 shares) |
|
| 12/15/05 |
| 1,098,400 |
| 1,098,400 |
| $ | 100.00{4 | } |
|
|
|
|
|
|
| Common stock (30,575 shares) |
|
| 12/15/05 |
| 30,575 |
| 30,575 |
| $ | 1.00{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| 12,654,856 |
| 12,654,856 |
|
|
| 2.19 | % |
|
4
Farming and Agriculture |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
The GSI Group, Inc. |
| Agricultural equipment manufacturer |
| Senior notes ($10,000,000 par due 5/2013) |
| 12.00% | 5/11/05 |
| 10,000,000 |
| 10,000,000 |
| $ | 1.00 |
|
|
|
| ||
|
|
|
| Common stock (7,500 shares) |
|
| 5/12/05 |
| 750,000 |
| 750,000 |
| $ | 100.00{4 | } |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
| 10,750,000 |
| 10,750,000 |
|
|
| 1.86 | % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Beverage, Food and Tobacco |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Farley’s & Sathers Candy Company, Inc. |
| Branded candy manufacturer |
| Junior secured loan ($10,000,000 par due 3/2011) |
| 11.62% (Libor + 6.00%/S) | 3/23/06 |
| 10,000,000 |
| 10,000,000 |
| $ | 1.00 |
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
| 10,000,000 |
| 10,000,000 |
|
|
| 1.73 | % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Housing - Building Materials |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
HB&G Building Products |
| Synthetic and wood product manufacturer |
| Senior subordinated loan ($8,572,021 par due 3/2011) |
| 13.00% cash, 2.00% PIK | 10/8/04 |
| 8,566,374 |
| 8,572,021 |
| $ | 1.00{2}{3} |
|
|
|
| ||
|
|
|
| Common stock (2,743 shares) |
|
| 10/8/04 |
| 752,888 |
| 752,888 |
| $ | 274.48{4 | } |
|
|
| ||
|
|
|
| Warrants to purchase 4,464 shares |
|
| 10/8/04 |
| 652,503 |
| 652,503 |
| $ | 146.17{4 | } |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
| 9,971,765 |
| 9,977,412 |
|
|
| 1.73 | % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Foxe Basin CLO 2003, Ltd. |
| Collateralized debt obligation |
| Preference shares (3,000 shares) |
|
| 10/8/04 |
| 2,682,785 |
| 2,682,785 |
| $ | 894.26{11}{12 | } |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Hudson Straits CLO 2004, Ltd. |
| Collateralized debt obligation |
| Preference shares (5,750 shares) |
|
| 10/8/04 |
| 4,947,252 |
| 4,876,792 |
| $ | 848.14{11}{12 | } |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
| 7,630,037 |
| 7,559,577 |
|
|
| 1.31 | % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total |
|
|
|
|
|
|
|
| $ | 888,483,712 |
| $ | 878,160,631 |
|
|
|
|
|
| |
{1} We do not “Control” any of our portfolio companies, as defined in the Investment Company Act of 1940. In general, under the 1940 Act, we would “Control” a portfolio company if we owned 25% or more of its voting securities. All of our portfolio company investments are subject to legal restriction on sales which as of June 30, 2006 represented 152% of the Company’s net assets.
{2} Pledged as collateral for the CP Funding Facility and unless otherwise noted, all other investments are pledged as collateral for the Revolving Credit Facility (see Note 7 to the consolidated financial statements).
{3} Has a payment-in-kind interest feature (see Note 2 to the consolidated financial statements).
{4} Non-income producing at June 30, 2006.
{5} As defined in the 1940 Act, we are an “Affiliate” of this portfolio company because we own more than 5% of the portfolio company’s outstanding voting securities. For the six months ended June 30, 2006, for this portfolio company there were total purchases of $5,000,000, redemptions of $7,528,880 (cost), sales of $6,054,725 (cost), interest income of $176,732, other income of $3,125, net realized gains of $47,283 and net unrealized losses of $6,118.
{6} As defined in the 1940 Act, we are an “Affiliate” of this portfolio company because we own more than 5% of the portfolio company’s outstanding voting securities. For the six months ended June 30, 2006, for this portfolio company there were total redemptions of $1,147,917 (cost), interest income of $1,201,966, other income of $82,724 and net unrealized losses of $2,438,800.
{7} As defined in the 1940 Act, we are an “Affiliate” of this portfolio company because we own more than 5% of the portfolio company’s outstanding voting securities. For the six months ended June 30, 2006, for this portfolio company there were total purchases of $19,500,391, redemptions of $4,899,870 (cost), interest income of $1,862,243, capital structuring service fees of $350,000 and other income of $71,540.
{8} As defined in the 1940 Act, we are an “Affiliate” of this portfolio company because we own more than 5% of the portfolio company’s outstanding voting securities. For the six months ended June 30, 2006, for this portfolio company there were total purchases of $28,732,342, redemptions of $5,000,000 (cost), interest income of $980,353, capital structuring service fees of $583,810 and other income of $9,484.
{9} As defined in the 1940 Act, we are an “Affiliate” of this portfolio company because we own more than 5% of the portfolio company’s outstanding voting securities. For the six months ended June 30, 2006, there were total purchases of $25,682,891 and interest income of $719,946.
{10} As defined in the 1940 Act, we are an “Affiliate” of this portfolio company because we own more than 5% of the portfolio company’s outstanding voting securities. For the six months ended June 30, 2006, there were total purchases of $30,000,000, interest income of $295,890 and capital structuring service fees of $250,000.
{11} Non-U.S. company or principal place of business outside the U.S.
{12} Non-registered investment company.
{13} 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 June 30, 2006.
5
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2005
Company {1} |
| Industry |
| Investment |
| Interest {10} |
| Initial |
| Amortized |
| Fair |
| Fair Value |
| Percentage |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Healthcare - Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
American Renal Associates, Inc. |
| Dialysis provider |
| Senior secured loan ($3,426,230 par due 12/2010) |
| 8.68% (Libor+ 4.00%/Q) |
| 12/14/05 |
| 3,426,230 |
| 3,426,230 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($180,328 par due 12/2010) |
| 8.50% (Libor+ 4.00%/Q) |
| 12/14/05 |
| 180,328 |
| 180,328 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($5,886,885 par due 12/2011) |
| 9.18% (Libor + 4.50%/Q) |
| 12/14/05 |
| 5,886,885 |
| 5,886,885 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($14,754 par due 12/2011) |
| 9.00% (Libor+ 4.50%/Q) |
| 12/14/05 |
| 14,754 |
| 14,754 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($7,213,115 par due 12/2011) |
| 11.68% (Libor + 7.00%/Q) |
| 12/14/05 |
| 7,213,115 |
| 7,213,115 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Capella Healthcare, Inc. |
| Acute care hospital operator |
| Junior secured loan ($29,000,000 par due 11/2013) |
| 10.45% (Libor + 6.00%/Q) |
| 12/1/05 |
| 29,000,000 |
| 29,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
PHNS, Inc. |
| Information technology and business process outsourcing |
| Senior subordinated loan ($16,000,000 par due 11/2011) |
| 13.50% cash, 2.5% PIK |
| 10/29/04 |
| 15,785,661 |
| 16,000,000 |
| $ | 1.00{3 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Triad Laboratory Alliance, LLC |
| Laboratory services |
| Senior subordinated loan ($9,714,888 par due 12/2012) |
| 12.00% cash, 1.75% PIK |
| 12/21/05 |
| 9,714,888 |
| 9,714,888 |
| $ | 1.00{3 | } |
|
|
|
|
|
|
| Senior secured loan ($3,000,000 par due 12/2011) |
| 7.78% (Libor + 3.25%/Q) |
| 12/21/05 |
| 3,000,000 |
| 3,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 74,221,861 |
| 74,436,200 |
|
|
| 13.07 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Containers-Packaging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Captive Plastics, Inc. |
| Plastics container manufacturer |
| Junior secured loan ($16,000,000 par due 2/2012) |
| 11.62% (Libor + 7.25%/M) |
| 12/19/05 |
| 16,000,000 |
| 16,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Industrial Container Services, LLC {7} |
| Industrial container manufacturer, reconditioner and servicer |
| Senior secured loan ($26,728,663 par due 9/2011) |
| 11.00% (Libor + 6.50%/Q) |
| 9/30/05 |
| 26,728,663 |
| 26,728,663 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($4,643,479 par due 9/2011) |
| 8.88% (Libor + 4.50%/M) |
| 9/30/05 |
| 4,643,479 |
| 4,643,479 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($1,160,870 par due 9/2011) |
| 10.25% (Base Rate + 3.00%/Q) |
| 9/30/05 |
| 1,160,870 |
| 1,160,870 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured revolving loan ($541,739 par due 9/2011) |
| 10.25% (Base Rate + 3.00%/Q) |
| 9/30/05 |
| 541,739 |
| 541,739 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Common stock (1,800,000 shares) |
|
|
| 9/29/05 |
| 1,800,000 |
| 1,800,000 |
| $ | 1.00{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
York Label Holdings, Inc. |
| Consumer product labels manufacturer |
| Senior subordinated loan ($10,368,791 par due 2/2010) |
| 10.00% cash, 4.00% PIK |
| 11/3/04 |
| 10,362,901 |
| 10,368,791 |
| $ | 1.00{2}{3 | } |
|
|
|
|
|
|
| Preferred stock (650 shares) |
| 10.00% |
| 11/3/04 |
| 3,742,445 |
| 3,742,445 |
| $ | 5,757.61{3 | } |
|
|
|
|
|
|
| Warrants to purchase 156,000 shares |
|
|
| 11/3/04 |
| 5,320,409 |
| 5,320,408 |
| $ | 34.11{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 70,300,506 |
| 70,306,395 |
|
|
| 12.34 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Environmental Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Mactec, Inc. |
| Engineering and environmental consulting services |
| Common stock (186 shares) |
|
|
| 11/3/04 |
| — |
| — |
| $ | 0.00{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United Site Services, Inc. |
| Portable restroom and site services |
| Senior secured loan ($5,061,957 par due 8/2011) |
| 7.37% (Libor + 3.00%/M) |
| 9/14/05 |
| 5,061,957 |
| 5,061,957 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($3,043,478 par due 8/2011) |
| 7.41% (Libor + 3.00%/Q) |
| 9/14/05 |
| 3,043,478 |
| 3,043,478 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($1,869,565 par due 8/2011) |
| 7.28% (Libor + 3.00%/Q) |
| 9/14/05 |
| 1,869,565 |
| 1,869,565 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Junior secured loan ($13,461,538 par due 6/2010) |
| 12.44% (Libor + 8.00%/Q) |
| 12/1/04 |
| 13,419,063 |
| 13,461,538 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Common stock (216,795 shares) |
|
|
| 10/8/04 |
| 1,353,851 |
| 1,353,851 |
| $ | 6.24{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Wastequip, Inc. |
| Waste management equipment manufacturer |
| Junior secured loan ($15,000,000 par due 7/2012) |
| 10.53% (Libor + 6.00%/Q) |
| 8/4/05 |
| 15,000,000 |
| 15,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
WCA Waste Systems, Inc. |
| Waste management services |
| Junior secured loan ($25,000,000 par due 10/2011) |
| 10.53% (Libor + 6.00%/Q) |
| 4/25/05 |
| 25,000,000 |
| 25,000,000 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 64,747,914 |
| 64,790,389 |
|
|
| 11.37 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Restaurants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
CICQ, LP |
| Restaurant franchisor, owner and operator |
| Limited partnership interest (26.5% interest) |
|
|
| 8/15/05 |
| 53,000,000 |
| 62,284,540 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| _ |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 53,000,000 |
| 62,284,540 |
|
|
| 10.93 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Services - Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diversified Collection Services, Inc. |
| Collections services |
| Senior secured loan ($6,300,000 par due 2/2011) |
| 8.38% (Libor + 4.00%/M) |
| 2/2/05 |
| 6,300,000 |
| 6,300,000 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior secured loan ($8,500,000 par due 8/2011) |
| 10.00% (Libor + 6.00%/Q) |
| 2/2/05 |
| 8,500,000 |
| 8,500,000 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Preferred stock (114,004 shares) |
|
|
| 2/2/05 |
| 295,270 |
| 295,270 |
| $ | 2.59{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Event Rentals, Inc. |
| Party rental services |
| Senior secured loan ($2,676,136 par due 11/2011) |
| 9.91% (Libor+ 5.25%/S) |
| 11/17/05 |
| 2,676,136 |
| 2,676,136 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($2,897,727 par due 11/2011) |
| 9.92% (Libor + 5.25%Q) |
| 11/17/05 |
| 2,897,727 |
| 2,897,727 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($170,455 par due 11/2011) |
| 11.50% (Base Rate + 4.25%/D) |
| 11/17/05 |
| 170,455 |
| 170,455 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($8,011,363 par due 11/2011) |
| 9.91% (Libor + 5.25%/S) |
| 11/17/05 |
| 8,011,363 |
| 8,011,363 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
GCA Services, Inc. |
| Custodial services |
| Senior subordinated loan ($32,743,750 par due 1/2010) |
| 12.00% cash, 3.00% PIK |
| 7/25/05 |
| 32,743,750 |
| 32,743,750 |
| $ | 1.00{3 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 61,594,701 |
| 61,594,701 |
|
|
| 10.81 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Arrow Group Industries, Inc. |
| Residential and outdoor shed manufacturer |
| Senior secured loan ($6,000,000 par due 4/2010) |
| 9.53% (Libor + 5.00%/Q) |
| 3/28/05 |
| 6,040,153 |
| 6,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Senior secured loan ($6,000,000 par due 10/2010) |
| 14.03% (Libor + 9.50%/Q) |
| 3/28/05 |
| 6,000,000 |
| 6,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Qualitor, Inc. |
| Automotive aftermarket components supplier |
| Senior secured loan ($827,059 par due 12/2011) |
| 8.27% (Libor + 4.00%/Q) |
| 12/29/04 |
| 827,059 |
| 827,059 |
| $ | 1.00{2 | } |
|
|
|
6
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2005
Company {1} |
| Industry |
| Investment |
| Interest {10} |
| Initial Acquisition Date |
| Amortized Cost |
| Fair Value |
| Fair Value Per Unit |
| Percentage of Net Assets |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| Senior secured loan ($1,152,941 par due 12/2011) |
| 8.53% (Libor + 4.00%/Q) |
| 12/29/04 |
| 1,152,941 |
| 1,152,941 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Junior secured loan ($5,000,000 par due 6/2012) |
| 11.53% (Libor + 7.00%/Q) |
| 12/29/04 |
| 5,000,000 |
| 5,000,000 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reflexite Corporation |
| Developer and manufacturer of high visibility reflective products |
| Senior subordinated loan ($10,304,329 par due 12/2011) |
| 11.00% cash, 3.00% PIK |
| 12/30/04 |
| 10,304,329 |
| 10,304,329 |
| $ | 1.00{2}{3 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Universal Trailer Corporation {5} |
| Livestock and specialty trailer manufacturer |
| Senior secured loan ($1,048,960 par due 3/2007) |
| 8.39% (Libor + 4.00%/M) |
| 10/8/04 |
| 1,054,725 |
| 1,054,725 |
| $ | 1.01 |
|
|
|
|
|
|
|
| Senior subordinated loan ($7,500,000 par due 9/2008) |
| 13.50% |
| 10/8/04 |
| 7,522,762 |
| 7,528,881 |
| $ | 1.00 |
|
|
|
|
|
|
|
| Common stock (50,000 shares) |
|
|
| 10/8/04 |
| 6,424,645 |
| 3,113,351 |
| $ | 62.27{4 | } |
|
|
|
|
|
|
| Warrants to purchase 22,208 shares |
|
|
| 10/8/04 |
| 1,505,776 |
| 1,382,826 |
| $ | 62.27{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Varel Holdings, Inc. |
| Drill bit manufacturer |
| Senior secured loan ($6,643,750 par due 12/2010) |
| 8.58% (Libor + 4.00%/S) |
| 5/18/05 |
| 6,643,750 |
| 6,643,750 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior secured loan ($2,333,333 par due 12/2010) |
| 8.47% (Libor + 4.00%/Q) |
| 5/18/05 |
| 2,333,333 |
| 2,333,333 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior secured loan ($3,333,333 par due 12/2011) |
| 12.48% (Libor + 8.00%/Q) |
| 5/18/05 |
| 3,333,333 |
| 3,333,333 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Preferred stock (30,451 shares) |
|
|
| 5/18/05 |
| 1,046,568 |
| 1,046,568 |
| $ | 34.37{3 | } |
|
|
|
|
|
|
| Common stock (30,451 shares) |
|
|
| 5/18/05 |
| 3,045 |
| 3,045 |
| $ | 0.10{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 59,192,419 |
| 55,724,141 |
|
|
| 9.78 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consumer Products - Non-Durable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Making Memories Wholesale, Inc. {6} |
| Scrapbooking branded products manufacturer |
| Senior secured loan ($9,143,750 par due 3/2011) |
| 8.50% (Libor + 4.00%/Q) |
| 5/5/05 |
| 9,143,750 |
| 9,143,750 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior subordinated loan ($10,000,000 par due 5/2012) |
| 12.00% cash, 2.50% PIK |
| 5/5/05 |
| 10,000,000 |
| 10,000,000 |
| $ | 1.00{3 | } |
|
|
|
|
|
|
| Preferred stock (3,500 shares) |
|
|
| 5/5/05 |
| 3,685,100 |
| 3,685,100 |
| $ | 1,052.89{3 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Shoes for Crews, LLC |
| Safety footwear and slip-related mats manufacturer |
| Senior secured loan ($1,478,167 par due 7/2010) |
| 9.00% (Base Rate + 1.75%/D) |
| 10/8/04 |
| 1,486,865 |
| 1,486,865 |
| $ | 1.01{2 | } |
|
|
|
|
|
|
| Senior secured loan ($47,247 par due 7/2010) |
| 7.78% (Libor + 3.25%/Q) |
| 10/8/04 |
| 47,525 |
| 47,525 |
| $ | 1.01{2 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Tumi Holdings, Inc. |
| Branded luggage designer, marketer and distributor |
| Senior secured loan ($2,500,000 par due 12/2012) |
| 7.28% (Libor + 2.75%/Q) |
| 5/24/05 |
| 2,500,000 |
| 2,500,000 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior secured loan ($5,000,000 par due 12/2013) |
| 7.78% (Libor + 3.25%/Q) |
| 3/14/05 |
| 5,000,000 |
| 5,000,000 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior subordinated loan ($13,008,799 par due 12/2014) |
| 15.53% (Libor + 6.00% cash, 5.00% PIK/Q) |
| 3/14/05 |
| 13,008,799 |
| 13,008,799 |
| $ | 1.00{2}{3 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 44,872,039 |
| 44,872,039 |
|
|
| 7.88 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Education |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Lakeland Finance, LLC |
| Private school operator |
| Senior secured note ($33,000,000 par due 12/2012) |
| 11.50% |
| 12/13/05 |
| 33,000,000 |
| 33,000,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 33,000,000 |
| 33,000,000 |
|
|
| 5.79 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consumer Products - Durable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
AWTP, LLC |
| Water treatment services |
| Junior secured loan ($13,600,000 par due 12/2012) |
| 13.50% (Base Rate + 6.25%/Q) |
| 12/21/05 |
| 13,600,000 |
| 13,600,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Berkline/Benchcraft Holdings LLC |
| Furniture manufacturer and distributor |
| Junior secured loan ($5,000,000 par due 5/2012) |
| 14.05% (Libor + 10.00%/Q) |
| 11/3/04 |
| 5,000,000 |
| 4,500,000 |
| $ | 0.90{2 | } |
|
|
|
|
|
|
| Preferred stock (2,536 shares) |
|
|
| 10/8/04 |
| 1,046,343 |
| 677,643 |
| $ | 267.21{4 | } |
|
|
|
|
|
|
| Warrants to purchase 483,020 shares |
|
|
| 10/8/04 |
| 2,752,559 |
| 1,782,640 |
| $ | 3.69{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 22,398,902 |
| 20,560,283 |
|
|
| 3.61 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Foxe Basin CLO 2003, Ltd. |
| Collateralized debt obligation |
| Preference shares (3,000 shares) |
|
|
| 10/8/04 |
| 2,743,440 |
| 2,743,440 |
| $ | 914.48{8}{9 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Hudson Straits CLO 2004, Ltd. |
| Collateralized debt obligation |
| Preference shares (5,750 shares) |
|
|
| 10/8/04 |
| 5,217,331 |
| 5,143,121 |
| $ | 894.46{8}{9 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
MINCS-Glace Bay, Ltd. |
| Collateralized debt obligation |
| Secured notes ($9,500,000 par due 7/2014) |
| 7.79% (Libor + 3.60%/Q) |
| 10/8/04 |
| 9,019,819 |
| 9,500,000 |
| $ | 1.00{8}{9 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 16,980,590 |
| 17,386,561 |
|
|
| 3.05 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Printing, Publishing and Broadcasting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Canon Communications LLC |
| Print publications services |
| Junior secured loan ($16,250,000 par due 11/2011) |
| 12.03% (Libor + 7.50%/Q) |
| 5/25/05 |
| 16,250,000 |
| 16,250,000 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 16,250,000 |
| 16,250,000 |
|
|
| 2.85 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Aerospace & Defense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
ILC Industries, Inc. |
| Industrial products provider |
| Junior secured loan ($6,500,000 par due 8/2012) |
| 10.28% (Libor + 5.75%/Q) |
| 8/30/05 |
| 6,529,232 |
| 6,500,000 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Thermal Solutions LLC |
| Thermal management and electronics packaging manufacturer |
| Senior secured loan ($5,973,529 par due 3/2011) |
| 9.71% (Libor + 5.25%/Q) |
| 3/28/05 |
| 5,973,529 |
| 5,973,529 |
| $ | 1.00{2 | } |
|
|
|
|
|
|
| Senior subordinated loan ($3,062,766 par due 3/2012) |
| 11.50% cash, 2.75% PIK |
| 3/28/05 |
| 3,067,225 |
| 3,062,766 |
| $ | 1.00{2}{3 | } |
|
|
|
|
|
|
| Preferred stock (29,400 shares) |
|
|
| 3/28/05 |
| 294,000 |
| 294,000 |
| $ | 10.00{4 | } |
|
|
|
|
|
|
| Common stock (600,000 shares) |
|
|
| 3/28/05 |
| 6,000 |
| 6,000 |
| $ | 0.01{4 | } |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| 15,869,986 |
| 15,836,295 |
|
|
| 2.78 | % |
|
7
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2005
Company |
| Industry |
| Investment |
| Interest{10} |
| Initial Acquisition Date |
| Amortized Cost |
| Fair Value |
| Fair Value Per Unit |
| Percentage of Net Assets |
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cargo Transport |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Kenan Advantage Group, Inc. |
| Fuel transportation provider |
| Senior subordinated loan ($8,870,968 par due 12/2013) |
| 13.00% |
| 12/15/05 |
| 8,870,968 |
| 8,870,968 |
| $ | 1.00 |
|
|
|
| ||
|
|
|
| Senior secured loan ($2,500,000 par due 12/2011) |
| 7.50% (Libor + 3.00%/Q) |
| 12/15/05 |
| 2,500,000 |
| 2,500,000 |
| $ | 1.00 |
|
|
|
| ||
|
|
|
| Preferred stock (10,984 shares) |
|
|
| 12/15/05 |
| 1,098,400 |
| 1,098,400 |
| $ | 100.00{4 | } |
|
|
| ||
|
|
|
| Common stock (30,575 shares) |
|
|
| 12/15/05 |
| 30,575 |
| 30,575 |
| $ | 1.00{4 | } |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| 12,499,943 |
| 12,499,943 |
|
|
| 2.19 | % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Farming and Agriculture |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
The GSI Group, Inc. |
| Agricultural equipment manufacturer |
| Senior notes ($10,000,000 par due 5/2013) |
| 12.00% |
| 5/11/05 |
| 10,000,000 |
| 10,000,000 |
| $ | 1.00 |
|
|
|
| ||
|
|
|
| Common stock (7,500 shares) |
|
|
| 5/12/05 |
| 750,000 |
| 750,000 |
| $ | 100.00{4 | } |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| 10,750,000 |
| 10,750,000 |
|
|
| 1.89 | % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Housing - Building Materials |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
HB&G Building Products |
| Synthetic and wood product manufacturer |
| Senior subordinated loan ($8,439,529 par due 3/2011) |
| 13.00% cash, 4.00% PIK |
| 10/8/04 |
| 8,435,645 |
| 8,439,529 |
| $ | 1.00{2}{3 | } |
|
|
| ||
|
|
|
| Common stock (2,743 shares) |
|
|
| 10/8/04 |
| 752,888 |
| 752,888 |
| $ | 274.48{4 | } |
|
|
| ||
|
|
|
| Warrants to purchase 4,464 shares |
|
|
| 10/8/04 |
| 652,503 |
| 652,503 |
| $ | 146.17{4 | } |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| 9,841,036 |
| 9,844,920 |
|
|
| 1.73 | % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Business Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Miller Heiman, Inc. |
| Sales consulting services |
| Senior secured loan ($4,521,687 par due 6/2010) |
| 8.14% (Libor + 3.75%/M) |
| 6/20/05 |
| 4,521,687 |
| 4,521,687 |
| $ | 1.00{2 | } |
|
|
| ||
|
|
|
| Senior secured loan ($4,058,379 par due 6/2012) |
| 8.78% (Libor + 4.25%/Q) |
| 6/20/05 |
| 4,058,379 |
| 4,058,379 |
| $ | 1.00{2 | } |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| 8,580,066 |
| 8,580,066 |
|
|
| 1.51 | % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cable Television |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Patriot Media & Communications CNJ, LLC |
| Cable services |
| Junior secured loan ($5,000,000 par due 10/2013) |
| 9.50% (Libor + 5.00%/Q) |
| 10/6/05 |
| 5,000,000 |
| 5,000,000 |
| $ | 1.00 |
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| 5,000,000 |
| 5,000,000 |
|
|
| 0.88 | % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Healthcare - Medical Products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Aircast, Inc. |
| Manufacturer of orthopedic braces, supports and vascular systems |
| Senior secured loan ($1,251,902 par due 12/2010) |
| 7.20% (Libor + 2.75%/Q) |
| 12/2/04 |
| 1,251,902 |
| 1,251,902 |
| $ | 1.00{2 | } |
|
|
| ||
|
|
|
| Junior secured loan ($1,000,000 par due 6/2011) |
| 11.45% (Libor + 7.00%/Q) |
| 12/2/04 |
| 1,000,000 |
| 1,000,000 |
| $ | 1.00{2 | } |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| 2,251,902 |
| 2,251,902 |
|
|
| 0.40 | % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total |
|
|
|
|
|
|
|
|
| $ | 581,351,865 |
| $ | 585,968,375 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
{1} We do not “Control” any of our portfolio companies, as defined in the Investment Company Act of 1940. In general, under the 1940 Act, we would “Control” a portfolio company if we owned 25% or more of its voting securities. All of our portfolio company investments are subject to legal restriction on sales which as of December 31, 2005 represented 103% of the Company’s net assets.
{2} Pledged as collateral for the credit facility payable (see Note 7 to the consolidated financial statements).
{3} Has a payment-in-kind interest feature (see Note 2 to the consolidated financial statements).
{4} Non-income producing at December 31, 2005.
{5} As defined in the 1940 Act, we are an “Affiliate” of this portfolio company because we own more than 5% of the portfolio company’s outstanding voting securities. For the year ended December 31, 2005, for this portfolio company there were total purchases of $2,000,000, redemptions of $2,919,939 (cost), interest income of $1,147,137, other income of $143,667, net realized losses of $4,278 and net unrealized losses of $3,429,198.
{6} As defined in the 1940 Act, we are an “Affiliate” of this portfolio company because we own more than 5% of the portfolio company’s outstanding voting securities. For the year ended December 31, 2005, for this portfolio company there were total purchases of $26,000,000, sales of $3,000,000 (cost), redemptions of $237,500 (cost), interest income of $1,514,431, capital structuring services fees of $862,500 and other income of $2,068.
{7} As defined in the 1940 Act, we are an “Affiliate” of this portfolio company because we own more than 5% of the portfolio company’s outstanding voting securities. For the year ended December 31, 2005, for this portfolio company there were total purchases of $54,647,808, total sales of $19,000,000 (cost), redemptions of $706,069 (cost), interest income of $943,631, capital structuring services fees of $1,058,750 and other income of $44,426.
{8} Non-U.S. company or principal place of business outside the U.S.
{9} Non-registered investment company.
{10} A majority of the variable rate loans to our portfolio companies bear interest at a rate that may be determined by reference to either Libor or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower’s option, which reset semi-annually (S), quarterly (Q), monthly (M) or daily (D). For each such loan, we have provided the current interest rate in effect at December 31, 2005.
8
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
|
| For the three |
| For the three |
| For the six |
| For the six |
| ||||
|
| months ended |
| months ended |
| months ended |
| months ended |
| ||||
|
| June 30, 2006 |
| June 30, 2005 |
| June 30, 2006 |
| June 30, 2005 |
| ||||
|
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
| ||||
INVESTMENT INCOME: |
|
|
|
|
|
|
|
|
| ||||
From non-control/non-affiliate investments: |
|
|
|
|
|
|
|
|
| ||||
Interest from investments |
| $ | 20,737,226 |
| $ | 6,027,175 |
| $ | 35,788,359 |
| $ | 10,947,830 |
|
Interest from cash & cash equivalents |
| 199,948 |
| 565,412 |
| 431,177 |
| 595,768 |
| ||||
Dividend income |
| 1,170,000 |
| 744,818 |
| 1,170,000 |
| 744,818 |
| ||||
Capital structuring service fees |
| 4,670,493 |
| 631,333 |
| 6,416,698 |
| 935,083 |
| ||||
Other income |
| 244,466 |
| 62,765 |
| 287,009 |
| 122,161 |
| ||||
Total investment income from non-control/non-affiliate investments |
| 27,022,133 |
| 8,031,503 |
| 44,093,243 |
| 13,345,660 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
From affiliate investments: |
|
|
|
|
|
|
|
|
| ||||
Interest from investments |
| 2,760,198 |
| 700,871 |
| 5,237,130 |
| 1,011,464 |
| ||||
Capital structuring service fees |
| 600,000 |
| 862,500 |
| 1,183,810 |
| 862,500 |
| ||||
Other income |
| 107,420 |
| 6,741 |
| 166,873 |
| 132,583 |
| ||||
Total investment income from affiliate investments |
| 3,467,618 |
| 1,570,112 |
| 6,587,813 |
| 2,006,547 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total investment income |
| 30,489,751 |
| 9,601,615 |
| 50,681,056 |
| 15,352,207 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
EXPENSES: |
|
|
|
|
|
|
|
|
| ||||
Base management fees |
| 3,107,197 |
| 1,027,135 |
| 5,650,856 |
| 1,841,847 |
| ||||
Incentive management fees |
| 6,940,399 |
| 1,798,919 |
| 9,863,283 |
| 2,069,202 |
| ||||
Administrative |
| 188,488 |
| 256,115 |
| 366,025 |
| 489,387 |
| ||||
Professional fees |
| 676,637 |
| 320,800 |
| 1,148,088 |
| 485,794 |
| ||||
Directors fees |
| 73,919 |
| 85,643 |
| 137,169 |
| 157,808 |
| ||||
Insurance |
| 198,431 |
| 144,400 |
| 386,532 |
| 287,213 |
| ||||
Interest and credit facility fees |
| 4,361,907 |
| 62,979 |
| 5,684,217 |
| 438,269 |
| ||||
Interest payable to the Investment Adviser |
| — |
| 31,814 |
| 25,879 |
| 83,539 |
| ||||
Amortization of debt issuance costs |
| 411,836 |
| 65,736 |
| 819,147 |
| 131,426 |
| ||||
Depreciation |
| 49,302 |
| — |
| 49,302 |
| — |
| ||||
Other |
| 217,105 |
| 39,940 |
| 385,612 |
| 69,759 |
| ||||
Total expenses |
| 16,225,221 |
| 3,833,481 |
| 24,516,110 |
| 6,054,244 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
NET INVESTMENT INCOME BEFORE INCOME TAXES |
| 14,264,530 |
| 5,768,134 |
| 26,164,946 |
| 9,297,963 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax expense, including excise tax |
| 4,971,635 |
| — |
| 5,180,515 |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
NET INVESTMENT INCOME |
| 9,292,895 |
| 5,768,134 |
| 20,984,431 |
| 9,297,963 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
REALIZED AND UNREALIZED GAIN ON INVESTMENTS: |
|
|
|
|
|
|
|
|
| ||||
Net realized gains (losses): |
|
|
|
|
|
|
|
|
| ||||
Net realized gains from non-control/non-affiliate investment transactions |
| 23,879,988 |
| 6,747,262 |
| 24,443,591 |
| 7,156,442 |
| ||||
Net realized gains (losses) from affiliate investment transactions |
| — |
| (1,880 | ) | 47,283 |
| (2,030 | ) | ||||
Net realized gains from investment transactions |
| 23,879,988 |
| 6,745,382 |
| 24,490,874 |
| 7,154,412 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net unrealized gains (losses): |
|
|
|
|
|
|
|
|
| ||||
Investment transactions from non-control/non-affiliate investments |
| (16,480,203 | ) | (4,910,024 | ) | (12,494,673 | ) | (343,793 | ) | ||||
Investment transactions from affiliate investments |
| — |
| (1,236 | ) | (2,444,918 | ) | (2,420 | ) | ||||
Net unrealized losses from investment transactions |
| (16,480,203 | ) | (4,911,260 | ) | (14,939,591 | ) | (346,213 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net realized and unrealized gain on investments |
| 7,399,785 |
| 1,834,122 |
| 9,551,283 |
| 6,808,199 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
NET INCREASE IN STOCKHOLDERS’ EQUITY RESULTING FROM OPERATIONS |
| $ | 16,692,680 |
| $ | 7,602,256 |
| $ | 30,535,714 |
| $ | 16,106,162 |
|
|
|
|
|
|
|
|
|
|
| ||||
BASIC AND DILUTED EARNINGS PER COMMON SHARE (see Note 4) |
| $ | 0.44 |
| $ | 0.33 |
| $ | 0.80 |
| $ | 0.91 |
|
|
|
|
|
|
|
|
|
|
| ||||
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING (see Note 4) |
| 38,089,889 |
| 23,164,444 |
| 38,039,574 |
| 17,683,309 |
|
See accompanying notes to consolidated financial statements.
9
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Six Months Ended June 30, 2006 (unaudited)
|
| Common Stock |
| Capital in |
| Distributions |
| Accumulated |
| Net Unrealized |
| Total |
| ||||||||
|
| Shares |
| Amount |
| Value |
| Income |
| Investments |
| Investments |
| Equity |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at December 31, 2005 |
| 37,909,484 |
| $ | 37,910 |
| $ | 559,192,554 |
| $ | — |
| $ | 5,765,225 |
| $ | 4,616,510 |
| $ | 569,612,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Shares issued in connection with dividend reinvestment plan |
| 297,770 |
| 298 |
| 4,999,876 |
| — |
| — |
| — |
| 5,000,174 |
| ||||||
Net increase in stockholders’ equity resulting from operations |
| — |
| — |
| — |
| 20,984,431 |
| 24,490,874 |
| (14,939,591 | ) | 30,535,714 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Dividend declared ($0.74 per share) |
| — |
| — |
| — |
| (20,984,431 | ) | (7,179,522 | ) | — |
| (28,163,953 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at June 30, 2006 |
| 38,207,254 |
| $ | 38,208 |
| $ | 564,192,430 |
| $ | — |
| $ | 23,076,577 |
| $ | (10,323,081 | ) | $ | 576,984,134 |
|
See accompanying notes to consolidated financial statements.
10
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Six Months Ended June 30, 2005 (unaudited)
|
| Common Stock |
| Capital in |
| Distributions |
| Accumulated |
| Net Unrealized |
| Total |
| ||||||||
|
| Shares |
| Amount |
| Value |
| Income |
| Investments |
| of Investments |
| Equity |
| ||||||
Balance at December 31, 2004 |
| 11,066,767 |
| $ | 11,067 |
| $ | 159,602,706 |
| $ | (136,415 | ) | $ | — |
| $ | 230,947 |
| $ | 159,708,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of common stock from add-on offering (net of offering and underwriting costs) |
| 12,075,000 |
| 12,075 |
| 183,859,340 |
| — |
| — |
| — |
| 183,871,415 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Reimbursement of underwriting costs paid by the Investment Adviser (see Note 9) |
| — |
| — |
| (2,475,000 | ) |
|
|
|
|
|
| (2,475,000 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Shares issued in connection with dividend reinvestment plan |
| 26,828 |
| 27 |
| 456,506 |
|
|
|
|
|
|
| 456,533 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net increase in stockholders’ equity resulting from operations |
| — |
| — |
| — |
| 9,297,963 |
| 7,154,412 |
| (346,213 | ) | 16,106,162 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Dividend declared ($0.62 per share) |
| — |
| — |
| — |
| (9,161,548 | ) | (1,572,927 | ) | — |
| (10,734,475 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance at June 30, 2005 |
| 23,168,595 |
| $ | 23,169 |
| $ | 341,443,552 |
| $ | — |
| $ | 5,581,485 |
| $ | (115,266 | ) | $ | 346,932,940 |
|
See accompanying notes to consolidated financial statements.
11
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
|
| For the six |
| For the six |
| ||
|
| months ended |
| months ended |
| ||
|
| June 30, 2006 |
| June 30, 2005 |
| ||
|
| (unaudited) |
| (unaudited) |
| ||
OPERATING ACTIVITIES: |
|
|
|
|
| ||
Net increase in stockholders’ equity resulting from operations |
| $ | 30,535,714 |
| $ | 16,106,162 |
|
Adjustments to reconcile net increase in stockholders’ equity resulting from operations: |
|
|
|
|
| ||
Net realized gain on investment transactions |
| (24,490,874 | ) | (7,154,412 | ) | ||
Net unrealized loss on investment transactions |
| 14,939,591 |
| 346,213 |
| ||
Net accretion of discount on securities |
| (20,292 | ) | 625 |
| ||
Increase in accrued payment-in-kind dividends and interest |
| (2,555,781 | ) | (1,460,731 | ) | ||
Amortization of debt issuance costs |
| 819,147 |
| 131,426 |
| ||
Depreciation |
| 49,302 |
| — |
| ||
Proceeds from sale and redemption of investments |
| 165,065,734 |
| 63,881,989 |
| ||
Purchases of investments |
| (456,011,118 | ) | (167,055,034 | ) | ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Interest receivable |
| (2,025,940 | ) | (2,239,348 | ) | ||
Other assets |
| (1,823,595 | ) | 256,973 |
| ||
Accounts payable and accrued expenses |
| 5,869,978 |
| (549,735 | ) | ||
Management and incentive fees payable |
| 6,569,562 |
| 2,583,939 |
| ||
Interest and facility fees payable |
| 2,792,017 |
| (33,197 | ) | ||
Interest payable to the Investment Adviser |
| (154,078 | ) | 83,539 |
| ||
|
|
|
|
|
| ||
Net cash used in operating activities |
| (260,440,633 | ) | (95,101,591 | ) | ||
|
|
|
|
|
| ||
FINANCING ACTIVITIES: |
|
|
|
|
| ||
Net proceeds from issuance of common stock |
| — |
| 183,871,415 |
| ||
Borrowings on credit facility payable |
| 374,200,000 |
| 23,500,000 |
| ||
Repayments on credit facility payable |
| (47,000,000 | ) | (79,000,000 | ) | ||
Underwriting costs payable to the Investment Adviser |
| (2,475,000 | ) | — |
| ||
Dividends paid in cash |
| (36,053,004 | ) | (6,184,023 | ) | ||
|
|
|
|
|
| ||
Net cash provided by financing activities |
| 288,671,996 |
| 122,187,392 |
| ||
|
|
|
|
|
| ||
CHANGE IN CASH AND CASH EQUIVALENTS |
| 28,231,363 |
| 27,085,801 |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
| 16,613,334 |
| 26,806,160 |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
| $ | 44,844,697 |
| $ | 53,891,961 |
|
|
|
|
|
|
| ||
Supplemental Information: |
|
|
|
|
| ||
Interest paid during the period |
| $ | 2,571,846 |
| $ | 385,265 |
|
Dividends declared during the period |
| $ | 28,163,953 |
| $ | 10,734,475 |
|
See accompanying notes to consolidated financial statements.
12
ARES CAPITAL CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| check |
|
|
| Cash |
| Investments |
| Receivable |
| Interest |
| Other |
| Credit |
| UW Costs |
| Payable |
| Div |
| A/P |
| Mgmt pay |
| Int & Fac |
| Int pay to |
| Stockholders’ |
|
STATEMENT OF CASH FLOWS |
| June 30, 2006 |
| (1 | ) | 44,844,697 |
| 878,160,631 |
| 6,962,236 |
| 7,854,038 |
| 4,608,731 |
| 345,200,000 |
| 0 |
| 0 |
| 0 |
| 7,092,656 |
| 10,047,596 |
| 3,105,947 |
| 0 |
| 576,984,134 |
|
Six Months Ended |
| December 31, 2005 |
| 1 |
| 16,613,334 |
| 585,968,375 |
| 1,581,752 |
| 5,828,098 |
| 3,653,585 |
| 18,000,000 |
| 2,475,000 |
| 5,500,000 |
| 12,889,225 |
| 1,222,678 |
| 3,478,034 |
| 313,930 |
| 154,078 |
| 569,612,199 |
|
June 30, 2006 |
|
|
| (2 | ) | 28,231,363 |
| 292,192,256 |
| 5,380,483 |
| 2,025,940 |
| 955,146 |
| 327,200,000 |
| (2,475,000 | ) | (5,500,000 | ) | (12,889,225 | ) | 5,869,978 |
| 6,569,562 |
| 2,792,017 | ) | (154,078 |
| 7,371,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in stockholders’ equity |
| 30,535,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 0 |
|
Adjustments to reconcile net increase in SHE to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain |
| (24,490,874 | ) |
|
|
|
| (24,490,874 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain/(loss) |
| 14,939,591 |
|
|
|
|
| 14,939,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PIK income |
| (2,555,781 | ) |
|
|
|
| (2,555,781 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt costs |
| 819,147 |
|
|
|
|
|
|
|
|
|
|
| 819,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
| 49,302 |
|
|
|
|
|
|
|
|
|
|
| 49,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion income |
| (20,292 | ) |
|
|
|
| (20,292 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in operating assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest receivable |
| (2,025,940 | ) |
|
|
|
|
|
|
|
| (2,025,940 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Escrowed funds receivable |
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
| (1,823,594 | ) |
|
|
|
|
|
|
|
|
|
| (1,823,594 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mgmt fee payable |
| 6,569,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6,569,562 |
|
|
|
|
|
|
|
Interest payable to the Investment Adviser |
| (154,078 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (154,078 | ) |
|
|
Interest and facility fees payable |
| 2,792,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,792,017 |
|
|
|
|
|
Accounts payable and accrued expenses |
| 5,869,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5,869,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
| 30,504,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments |
| (456,011,119 | ) |
|
|
|
| (450,511,119 | ) |
|
|
|
|
|
|
|
|
|
| (5,500,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
Sale of investments |
| 165,065,734 |
|
|
|
|
| 170,446,218 |
| (5,380,483 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
| (290,945,385 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from credit facility |
| 374,200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
| 374,200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paydowns on credit facility |
| (47,000,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
| (47,000,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of stock |
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 0 |
|
Reinvested dividends (offset against dividend paid) |
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5,000,174 | ) |
|
|
|
|
|
|
|
| 5,000,174 |
|
Underwriting costs payable to the Investment Adviser |
| (2,475,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,475,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
| 0 |
|
Credit facility financing costs |
| 0 |
|
|
|
|
|
|
|
|
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared in period |
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 28,163,953 |
|
|
|
|
|
|
|
|
| (28,163,953 | ) |
Dividend paid during period |
| (36,053,005 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (36,053,005 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
| 288,671,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS |
| 28,231,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
| 16,613,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
| 44,844,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference |
| 0 |
|
|
| 28,231,363 |
| -1 |
| 0 |
| 0 |
| 0 |
| 0 |
|
|
| 0 |
| -2 |
| 0 |
| 0 |
| 0 |
| 0 |
| 30,535,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income |
| 30,535,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (11,286,546 | ) |
|
|
|
|
|
| Difference |
| (0 | ) |
See accompanying notes to consolidated financial statements.
13
ARES CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2006 (unaudited)
1. ORGANIZATION
Ares Capital Corporation (the “Company” or “ARCC” or “we”) is a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland that is regulated as a business development company under the Investment Company Act of 1940 (“1940 Act”). We were incorporated on April 16, 2004 and were initially funded on June 23, 2004. On October 8, 2004, we completed our initial public offering (the “IPO”). On the same date, we commenced substantial investment operations.
The Company has qualified and has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986 (the “Code”), as amended. The Company expects to continue to qualify and to elect to be treated for tax purposes as a RIC. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases may include an equity component, and, to a lesser extent, in equity investments in private middle market companies.
We are externally managed by Ares Capital Management LLC (the “Investment Adviser”), an affiliate of Ares Management LLC (“Ares Management”), an independent Los Angeles based firm that manages investment funds. Ares Technical Administration LLC (“Ares Administration”), an affiliate of Ares Management, provides the administrative services necessary for us to operate.
Interim financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim period, have been included. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2006.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States, and include the accounts of the Company and its wholly owned subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All significant intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, liquid investments in a money market fund. Cash and cash equivalents are carried at cost which approximates fair value.
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.
14
Investments
Investment transactions are recorded on the trade date. Realized gains or losses are computed using the specific identification method. Investments for which market quotations are readily available are valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued at fair value as determined in good faith by our board of directors based on the input of our investment adviser and audit committee. In addition, the board of directors currently receives input from an independent valuation firm that has been engaged at the direction of the board to value each portfolio security at least once during a trailing 12 month period. The valuation process is conducted at the end of each fiscal quarter, with approximately a quarter of our portfolio companies subject to valuation by the independent valuation firm each quarter. The types of factors that the board may take into account in fair value pricing of our investments include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors.
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our private equity valuation. Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments, and the differences could be material.
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:
· Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment.
· Preliminary valuation conclusions are then documented and discussed with our senior management.
· The audit committee of our board of directors reviews these preliminary valuations as well as valuations with respect to approximately a quarter of our portfolio companies prepared by an independent valuation firm.
· The board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of our investment adviser and audit committee and the independent valuation firm.
Interest Income Recognition
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. If any cash is received after it is determined that interest is no longer collectible, we will treat the cash as payment on the principal balance until the entire principal balance has been repaid, before any interest income is recognized. Discounts and premiums on securities purchased are accreted/amortized over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortizations of premium on bonds.
Payment in Kind Interest
The Company has loans in its portfolio that contain a payment-in-kind (“PIK”) provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends, even though the Company has not yet collected the cash. For the three and six months ended June 30, 2006, the Company recorded $1,610,327 and $2,555,781, respectively, in PIK income. For the three and six months ended June 30, 2005, the Company recorded $771,892 and $1,460,731, respectively, in PIK income.
15
Capital Structuring Service Fees
The Company’s Investment Adviser seeks to provide assistance to the portfolio companies in connection with the Company’s investments and in return the Company may receive fees for capital structuring services. These fees are normally paid at the closing of the investments, are generally non-recurring and are recognized as revenue when earned upon closing of the investment. The services that the Company’s Investment Adviser provides vary by investment, but generally consist of reviewing existing credit facilities, arranging bank financing, arranging equity financing, structuring financing from multiple lenders, structuring financing from equity investors, restructuring existing loans, raising equity and debt capital, and providing general financial advice, which concludes upon closing of the loan. The Company’s Investment Adviser may also take a seat on the board of directors of a portfolio company, or observe the meetings of the board of directors without taking a formal seat. Any services of the above nature subsequent to the closing would generally generate a separate fee payable to the Company. In certain instances where the Company is invited to participate as a co-lender in a transaction and in the event that the Company does not provide significant services in connection with the investment, a portion of loan fees paid to the Company in such situations will be deferred and amortized over the estimated life of the loan.
Foreign Currency Translation
The Company’s books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:
(1) Market value of investment securities, other assets and liabilities — at the exchange rates prevailing at the end of the day.
(2) Purchases and sales of investment securities, income and expenses — at the rates of exchange prevailing on the respective dates of such transactions.
Although the net assets and the fair values are presented at the foreign exchange rates at the end of the day, the Company does not isolate the portion of the results of the operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair value of investments. Such fluctuations are included with the net realized and unrealized gains or losses from investments. Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. Government securities. These risks include but are not limited to revaluation of currencies and future adverse political and economic developments which could cause investments in their markets to be less liquid and prices more volatile than those of comparable U.S. companies.
Offering Expenses
The Company’s offering costs were charged against the proceeds from the Add-on Offering (as defined in Note 10) when received. For the six months ended June 30, 2005, the Company incurred approximately $635,000 of such costs.
Debt Issuance Costs
Debt issuance costs are being amortized over the life of the related credit facility using the straight line method which approximates the interest method.
Federal Income Taxes
The Company has qualified and elected and intends to continue to qualify for the tax treatment applicable to regulated investment companies under Subchapter M of the Code and, among other things, has made and intends to continue to make the requisite distributions to its stockholders which will relieve the Company from Federal income taxes. In order to qualify as a RIC, among other factors, the Company is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year.
Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4%
16
excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three and six months ended June 30, 2006, the Company recorded a provision of approximately $727,000 and $826,000, respectively, for Federal excise tax. As of June 30, 2006, the entire amount was unpaid and included in accounts payable on the accompanying consolidated balance sheet.
Our wholly owned subsidiaries ARCC Cervantes Corporation (“ACC”) and ARCC Cervantes LLC (“ACLLC”) are subject to Federal and state income taxes. For the three and six months ended June 30, 2006, we recorded a tax provision of approximately $4,244,000 and $4,354,000, respectively, for these subsidiaries.
Dividends
Dividends and distributions to common stockholders are recorded on the record date. The amount to be paid out as a dividend is determined by the board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed at least annually, although we may decide to retain such capital gains for investment.
We have adopted a dividend reinvestment plan that provides for reinvestment of our distributions on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not ‘‘opted out’’ of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of actual and contingent assets and liabilities at the date of the financial statements and the reported amounts of income or loss and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation of investments.
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments approximate fair value. The carrying value of interest and open trade receivables, accounts payable and accrued expenses, as well as the credit facility payable approximate fair value due to their short maturity.
3. AGREEMENTS
The Company has entered into an investment advisory agreement (the “Advisory Agreement”) with the Investment Adviser under which the Investment Adviser, subject to the overall supervision of our board of directors, provides investment advisory services to ARCC. For providing these services, the Investment Adviser receives a fee from us, consisting of two components—a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.5% of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds). For services rendered under the Advisory Agreement during the period commencing from October 8, 2004 through and including December 31, 2004, the base management fee is payable monthly in arrears. For services rendered under the Advisory Agreement after that time, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) at the end of the two most recently completed calendar quarters.
The incentive fee has two parts. One part is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive
17
from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the administration agreement, and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature such as market discount, debt instruments with payment-in-kind interest, preferred stock with payment-in-kind dividends and zero coupon securities, accrued income that we have not yet received in cash. The Investment Adviser is not under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never received as a result of a default by an entity on the obligation that resulted in the accrual of such income.
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a fixed “hurdle rate” of 2.00% per quarter.
We pay the Investment Adviser an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:
· no incentive fee in any calendar quarter in which the pre-incentive fee net investment income does not exceed the hurdle rate;
· 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% in any calendar quarter. We refer to this portion of our pre-incentive fee net investment income (which exceeds the hurdle rate but is less than 2.50%) as the “catch-up” provision. The “catch-up” is meant to provide our Investment Adviser with 20% of the pre-incentive fee net investment income as if a hurdle rate did not apply if this net investment income exceeds 2.50% in any calendar quarter; and
· 20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.50% in any calendar quarter.
These calculations are adjusted for any share issuances or repurchases during the quarter.
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Advisory Agreement, as of the termination date), commencing with the calendar year ending on December 31, 2004, and equals 20% of our realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation for such year.
We defer cash payment of any incentive fee otherwise earned by the Investment Adviser if during the most recent four full calendar quarter periods ending on or prior to the date such payment is to be made the sum of (a) the aggregate distributions to the stockholders and (b) the change in net assets (defined as total assets less indebtedness) is less than 8.0% of our net assets at the beginning of such period. These calculations are appropriately pro rated during the first three calendar quarters following October 8, 2004 and are adjusted for any share issuances or repurchases.
For the three and six months ended June 30, 2006, we incurred $3,107,197 and $5,650,856, respectively, in base management fees and $4,083,937 and $7,006,821, respectively, in incentive management fees related to pre-incentive fee net investment income. For the three and six months ended June 30, 2006, we incurred $2,856,462 in incentive management fees related to realized capital gains. As of June 30, 2006, $10,047,596 was unpaid and included in management and incentive fees payable in the accompanying consolidated balance sheet.
For the three and six months ended June 30, 2005, we incurred $1,027,135 and $1,841,847, respectively, in base management fees and $633,559 and $871,300, respectively, in incentive
18
management fees related to pre-incentive fee net investment income. For the three and six months ended June 30, 2005, we incurred $1,165,360 and $1,197,902, respectively, in incentive management fees related to realized capital gains.
We also entered into a separate administration agreement (the “Administration Agreement”) with Ares Administration under which Ares Administration furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities. Under the Administration Agreement, Ares Administration also performs or oversees the performance of our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, Ares Administration assists us in determining and publishing the net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Under the Administration Agreement, Ares Administration also provides on our behalf, managerial assistance to those portfolio companies to which we are required to provide such assistance. The Administration Agreement may be terminated by either party without penalty upon 60-days’ written notice to the other party.
For the three and six months ended June 30, 2006, we incurred $188,488 and $366,024, respectively, in administrative fees. As of June 30, 2006, $188,488 was unpaid and included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.
For the three and six months ended June 30, 2005, we incurred $256,115 and $489,387, respectively, in administrative fees.
4. EARNINGS PER SHARE
The following information sets forth the computation of basic and diluted net increase in stockholders’ equity per share resulting from the three and six months ended June 30, 2006:
| Three months |
| Six months |
| |||
|
| ended |
| ended |
| ||
|
| June 30, 2006 |
| June 30, 2006 |
| ||
|
|
|
|
|
| ||
Numerator for basic and diluted net increase in stockholders’ equity resulting from operations per share: |
| $ | 16,692,680 |
| $ | 30,535,714 |
|
|
|
|
|
|
| ||
Denominator for basic and diluted net increase in stockholders’ equity resulting from operations per share: |
| 38,089,889 |
| 38,039,574 |
| ||
|
|
|
|
|
| ||
Basic and diluted net increase in stockholders’ equity resulting from operations per share: |
| $ | 0.44 |
| $ | 0.80 |
|
The following information sets forth the computation of basic and diluted net increase in stockholders’ equity per share resulting from the three and six months ended June 30, 2005:
| Three months |
| Six months |
| |||
|
| ended |
| ended |
| ||
|
| June 30, 2005 |
| June 30, 2005 |
| ||
|
|
|
|
|
| ||
Numerator for basic and diluted net increase in stockholders’ equity resulting from operations per share: |
| $ | 7,602,256 |
| $ | 16,106,162 |
|
|
|
|
|
|
| ||
Denominator for basic and diluted net increase in stockholders’ equity resulting from operations per share: |
| 23,164,444 |
| 17,683,309 |
| ||
|
|
|
|
|
| ||
Basic and diluted net increase in stockholders’ equity resulting from operations per share: |
| $ | 0.33 |
| $ | 0.91 |
|
19
5. INVESTMENTS
For the six months ended June 30, 2006, the Company purchased (A) $303.8 million aggregate principal amount of senior term debt, (B) $103.6 million aggregate principal amount of senior subordinated debt and (C) $43.1 million of investments in equity securities.
In addition, for the six months ended June 30, 2006, (1) $49.2 million aggregate principal amount of senior term debt and (2) $17.9 million aggregate principal amount of senior subordinated debt were redeemed. Additionally, (A) $63.4 million of investments in equity securities and (B) $6.1 million aggregate principal amount of senior term debt were sold.
As of June 30, 2006, investments and cash and cash equivalents consisted of the following:
| Amortized Cost |
| Fair Value |
| |||
Cash and cash equivalents |
| $ | 44,844,697 |
| $ | 44,844,697 |
|
Senior term debt |
| 587,928,282 |
| 586,139,016 |
| ||
Senior notes |
| 10,000,000 |
| 10,000,000 |
| ||
Senior subordinated debt |
| 217,564,146 |
| 217,764,213 |
| ||
Collateralized debt obligations |
| 7,630,037 |
| 7,559,577 |
| ||
Equity securities |
| 65,361,247 |
| 56,697,825 |
| ||
Total |
| $ | 933,328,409 |
| $ | 923,005,328 |
|
As of December 31, 2005, investments and cash and cash equivalents consisted of the following:
| Amortized Cost |
| Fair Value |
| |||
Cash and cash equivalents |
| $ | 16,613,334 |
| $ | 16,613,334 |
|
Senior term debt |
| 338,993,970 |
| 338,467,061 |
| ||
Senior notes |
| 10,000,000 |
| 10,000,000 |
| ||
Senior subordinated debt |
| 129,816,927 |
| 130,042,698 |
| ||
Collateralized debt obligations |
| 16,980,590 |
| 17,386,561 |
| ||
Equity securities |
| 85,560,378 |
| 90,072,055 |
| ||
Total |
| $ | 597,965,199 |
| $ | 602,581,709 |
|
The amortized cost represents the original cost adjusted for the accretion of discounts and amortization of premiums on debt using the effective interest method.
The industry and geographic compositions of the portfolio at fair value at June 30, 2006 and December 31, 2005 were as follows:
Industry |
| June 30, 2006 |
| December 31, 2005 |
|
Health Care |
| 19.3 | % | 13.1 | % |
Manufacturing |
| 12.6 |
| 9.5 |
|
Consumer Products |
| 10.7 |
| 11.2 |
|
Containers/Packaging |
| 8.5 |
| 12.0 |
|
Printing/Publishing |
| 8.3 |
| 2.8 |
|
Other Services |
| 7.5 |
| 10.5 |
|
Education |
| 6.5 |
| 5.6 |
|
Environmental Services |
| 5.9 |
| 11.0 |
|
Business Services |
| 3.9 |
| 1.5 |
|
Restaurants |
| 3.1 |
| 10.6 |
|
Aerospace and Defense |
| 3.0 |
| 2.7 |
|
Broadcasting/Cable |
| 2.9 |
| 0.9 |
|
Computers/Electronics |
| 2.1 |
| 0.0 |
|
Cargo Transport |
| 1.4 |
| 2.1 |
|
Farming and Agriculture |
| 1.2 |
| 1.8 |
|
Beverage/Food/Tobacco |
| 1.1 |
| 0.0 |
|
Homebuilding |
| 1.1 |
| 1.7 |
|
Financial |
| 0.9 |
| 3.0 |
|
Total |
| 100.0 | % | 100.0 | % |
20
Geographic Region |
| June 30, 2006 |
| December 31, 2005 |
|
West |
| 28.0 | % | 38.9 | % |
Southeast |
| 24.0 |
| 10.2 |
|
Mid-Atlantic |
| 23.9 |
| 24.3 |
|
Midwest |
| 13.0 |
| 12.3 |
|
Northeast |
| 8.0 |
| 11.3 |
|
International |
| 3.1 |
| 3.0 |
|
Total |
| 100.0 | % | 100.0 | % |
6. COMMITMENTS AND CONTINGENCIES
As of June 30, 2006, the Company had committed to make a total of approximately $84.0 million of investments in various revolving senior secured loans. As of June 30, 2006, $50.4 million was unfunded. Included within the $84.0 million commitment in revolving secured loans is a commitment to issue up to $3.8 million in standby letters of credit through a financial intermediary on behalf of certain portfolio companies. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio companies were to default on their related payment obligations. As of June 30, 2006, the Company had $2.8 million in standby letters of credit issued and outstanding on behalf of the portfolio companies, of which no amounts were recorded as a liability. Of these letters of credit, $2.3 million expire on September 30, 2006 and $500,000 expire on July 31, 2007. These letters of credit may be extended under substantially similar terms for additional one-year terms at the Company’s option until the revolving line of credit, under which the letters of credit were issued, matures on September 30, 2011.
As of June 30, 2006, the Company was subject to a subscription agreement to fund up to $10.0 million of equity commitments in a private equity investment partnership. As of June 30, 2006, there were no amounts funded in this partnership.
As of December 31, 2005, the Company had committed to make a total of approximately $43.0 million of investments in various revolving senior secured loans. As of December 31, 2005, $28.8 million was unfunded. Included within the $43.0 million commitment in revolving secured loans is a commitment to issue up to $3.2 million in standby letters of credit through a financial intermediary on behalf of a portfolio company. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio company was to default on its related payment obligations. As of December 31, 2005, the Company had $2.2 million in standby letters of credit issued and outstanding on behalf of the portfolio company, of which no amounts were recorded as a liability.
7. CREDIT FACILITIES PAYABLE
In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. On October 29, 2004, we formed Ares Capital CP Funding LLC (“Ares Capital CP”), a wholly owned subsidiary of the Company, through which we established a revolving credit facility (the “CP Funding Facility”). On November 3, 2004, we entered into the CP Funding Facility that, as amended, allows Ares Capital CP to issue up to $350.0 million of variable funding certificates (“VFC”). As part of the CP Funding Facility, we are subject to limitations as to how borrowed funds may be used including restrictions on geographic concentrations, sector
21
concentrations, loan size, payment frequency and status, average life, collateral interests and investment ratings as well as regulatory restrictions on leverage which may affect the amount of VFC that we may issue from time to time. There are also certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early amortization of the CP Funding Facility and limit further advances under the CP Funding Facility and in some cases could be an event of default. Such limitations, requirements, and associated defined terms are as provided for in the documents governing the CP Funding Facility. As of June 30, 2006, there was $101.2 million outstanding under the CP Funding Facility and the Company continues to be in compliance with all of the limitations and requirements of the CP Funding Facility. As of December 31, 2005 there was $18.0 million outstanding under the CP Funding Facility.
The CP Funding Facility expires on November 1, 2006. If the CP Funding Facility is not extended beyond November 1, 2006, any principal amounts then outstanding will be amortized over a 24-month period from the termination date. Under the terms of the CP Funding Facility, we are required to pay a renewal fee of 0.375% of the total amount available for borrowing on or around each November 3.
The interest charged on the VFC is based on the commercial paper rate plus 0.75%. The interest charged on the VFC is payable quarterly. As of June 30, 2006 the commercial paper rate was 5.2085% and as of December 31, 2005 the commercial paper rate was 4.3223%. For the three and six months ended June 30, 2006, the average interest rate (i.e. commercial paper rate plus the spread) was 5.73% and 5.50%, respectively. For the three and six months ended June 30, 2005, the average interest rate (i.e. commercial paper rate plus the spread) was 4.27% and 4.02%, respectively. For the three and six months ended June 30, 2006, the average outstanding balance was $87,749,451 and $78,145,856, respectively. There was no balance outstanding during the three months ended June 30, 2005. For the six months ended June 30, 2005 the average outstanding balance was $17,127,072. For the three and six months ended June 30, 2006 the interest expense incurred was $1,265,069 and $2,190,906, respectively. For the three months ended June 30, 2005, no interest expense was incurred. For the six months ended June 30, 2005 the interest expense incurred was $324,734. Cash paid for interest expense during the six months ended June 30, 2006 and June 30, 2005 was $1,147,470 and $385,265, respectively.
The Company is also required to pay a commitment fee for any unused portion of the CP Funding Facility. Initially, the commitment fee was 0.175% per annum. On April 8, 2005 the Company entered into an amendment to the CP Funding Facility and in connection therewith, the commitment fee was temporarily reduced to 0.11% per annum until the earlier of (a) the date the total borrowings outstanding exceed $150.0 million or (b) October 3, 2005, after which the commitment fee was 0.175% per annum. On November 14, 2005 the Company entered into an amendment to the CP Funding Facility and in connection therewith, the commitment fee was reduced to 0.10% per annum prior to the first time that the borrowings outstanding under the CP Funding Facility equal or exceed $200.0 million and 0.125% per annum on and after the first time that the borrowings outstanding under the CP Funding Facility exceed $200.0 million. For the three months and six months ended June 30, 2006, the commitment fee incurred was $66,313 and $136,451, respectively. For the three and six months ended June 30, 2005, the commitment fee incurred was $62,979 and $113,535, respectively.
In December 2005, we entered into a senior secured revolving credit facility (the “Revolving Credit Facility”) under which the lenders have agreed to extend credit to the Company in an initial aggregate principal amount not exceeding $250 million at any one time outstanding. The Revolving Credit Facility expires on December 28, 2010 and with certain exceptions is secured by substantially all of the assets in our portfolio (other than investments held by Ares Capital CP under the CP Funding Facility). 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
22
assets (less total liabilities) to total indebtedness, of the Company and its subsidiaries, of not less than 2.0:1.0, (f) maintaining minimum liquidity, and (g) limitations on the creation or existence of agreements that prohibit liens on certain properties of the Company and its subsidiaries.
In addition to the asset coverage ratio described above, borrowings under the Revolving Credit Facility (and the incurrence of certain other permitted debt) will be subject to compliance with a borrowing base that will apply different advance rates to different types of assets in our portfolio. The Revolving Credit Facility also includes an “accordion” feature that allows us to increase the size of the Revolving Credit Facility to a maximum of $500 million under certain circumstances. The Revolving Credit Facility also includes usual and customary events of default for senior secured revolving credit facilities of this nature. As of June 30, 2006, there was $244.0 million outstanding under the Revolving Credit Facility and the Company continues to be in compliance with all of the limitations and requirements of the Revolving Credit Facility. As of December 31, 2005, there were no amounts outstanding under the Revolving Credit Facility.
The interest charged under the Revolving Credit Facility is based on LIBOR (one, two, three or six month) plus 1.00%, generally. As of June 30, 2006, the one, two, three and six month LIBOR were 5.33%, 5.42%, 5.48% and 5.59%, respectively. For the three and six months ended June 30, 2006, the average interest rate was 6.73% and 6.69%, respectively. For the three and six months ended June 30, 2006, the average outstanding balance was $177,934,066 and $96,154,696, respectively. For the three and six months ended June 30, 2006, the interest expense incurred was $2,985,726 and $3,189,986, respectively. Cash paid for interest expense during the six months ended June 30, 2006 was $1,424,375. As of December 31, 2005, the one, two, three and six month LIBOR were 4.39%, 4.48%, 4.54% and 4.70%, respectively. The Company is also required to pay a commitment fee of 0.20% for any unused portion of the Revolving Credit Facility. For the three and six months ended June 30, 2006, the commitment fee incurred was $34,710 and $149,288, respectively.
As of June 30, 2006, the Company had $3.7 million in standby letters of credit issued through the Revolving Credit Facility.
8. DERIVATIVE INSTRUMENTS
In 2005, we entered into a costless collar agreement in order to manage the exposure to changing interest rates related to the Company’s fixed rate investments. The costless collar agreement is for a notional amount of $20 million, has a cap of 6.5%, a floor of 2.72% and matures in 2008. The costless collar agreement allows us to receive an interest payment for any quarterly period when the 3-month LIBOR exceeds 6.5%, and requires us to pay an interest payment for any quarterly period when the 3-month LIBOR is less than 2.72%. The costless collar resets quarterly based on the 3-month LIBOR. As of June 30, 2006, the 3-month LIBOR was 5.48%. As of June 30, 2006 these derivatives had no fair value.
9. RELATED PARTY TRANSACTIONS
Gross underwriting costs related to the IPO were $7,425,000 or $0.675 per share. As a part of the IPO, the Investment Adviser, on our behalf, agreed to pay the underwriters $0.225 of the $0.675 per share in underwriting discount and commissions for a total of approximately $2.5 million. We were obligated to repay this amount, together with accrued interest (charged at the 3-month LIBOR plus 2% starting on October 8, 2004) (a) if during any four calendar quarter period ending on or after October 8, 2005 the sum of (i) the aggregate distributions, including return of capital, if any, to the stockholders and (ii) the change in net assets (defined as total assets less indebtedness) equals or exceeds 7.0% of the net assets at the beginning of such period (as adjusted for any share issuances or repurchases) or (b) upon the Company’s liquidation. On March 8, 2005, the Company’s board of directors approved entering into an amended and restated agreement with the Investment Adviser whereby the Company would be obligated to repay the Investment Adviser for the approximate $2.5 million only if the conditions for repayment referred to above were met before the third anniversary of the IPO. If one or more such events did not occur on or before October 8, 2007, we would not be obligated to repay this amount to the Investment Adviser. For
23
the year ended December 31, 2005, the sum of our aggregate distributions to our stockholders and our change in net assets exceeded 7.0% of net assets as of December 31, 2004 (as adjusted for any share issuances). As a result, in February 2006 we repaid this amount together with accrued interest.
In accordance with the Advisory Agreement, we bear all costs and expenses of the operation of the Company and reimburse the Investment Adviser for all such costs and expenses incurred in the operation of the Company. For the three and six months ended June 30, 2006, the Investment Adviser incurred such expenses totaling $93,862 and $230,727, respectively. Accordingly, the Company has recorded a liability at June 30, 2006 to the Investment Adviser for the entire amount not yet reimbursed. As of June 30, 2006, $93,862 was payable to the Investment Adviser and such payable is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. For the three and six months ended June 30, 2005, the Investment Adviser incurred such expenses totaling $31,220 and $41,912, respectively.
As of June 30, 2006, Ares Management LLC, of which the Investment Adviser is a wholly owned subsidiary, owned 666,667 shares of the Company’s common stock representing approximately 1.7% of the total shares outstanding as of June 30, 2006.
See Note 3 for a description of other related party transactions.
10. STOCKHOLDERS’ EQUITY
On March 23, 2005, we completed a public add-on offering (the “Add-on Offering”) of 12,075,000 shares of common stock (including the underwriters’ overallotment of 1,575,000 shares) at $16.00 per share, less an underwriting discount and commissions totaling $0.72 per share. Total proceeds received from the Add-on Offering, net of the underwriters’ discount and offering costs, were $183.9 million.
11. DIVIDEND
For the three months ended June 30, 2006, the Company declared a dividend on May 8, 2006 of $0.38 per share for a total of $14,481,380. The record date was June 15, 2006 and the dividend was distributed on June 30, 2006. For the three months ended March 31, 2006, the Company declared a dividend on February 28, 2006 of $0.36 per share for a total of $13,682,573. The record date was March 24, 2006 and the dividend was distributed on April 14, 2006.
For the three months ended June 30, 2005, the Company declared a dividend on June 20, 2005 of $0.32 per share for a total of $7,413,951. The record date was June 30, 2005 and the dividend was distributed on July 15, 2005. For the three months ended March 31, 2005, the Company declared a dividend on February 23, 2005 of $0.30 per share for a total of $3,320,524. The record date was March 7, 2005 and the dividend was distributed on April 15, 2005.
24
12. FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the six months ended June 30, 2006 and for the six months ended June 30, 2005:
Per Share Data:
| For the six |
| For the six |
| |||
|
| months ended |
| months ended |
| ||
|
| June 30, 2006 |
| June 30, 2005 |
| ||
Net asset value, beginning of period (1) |
| $ | 15.03 |
| $ | 14.43 |
|
Issuance of common stock |
| 0.01 |
| 0.42 |
| ||
Effect of dilution |
| — |
| (0.03 | ) | ||
Underwriting costs paid by the Investment Adviser (see Note 9) (2) |
| — |
| (0.14 | ) | ||
Net investment income for period (2) |
| 0.55 |
| 0.53 |
| ||
Net realized and unrealized gains for period (2) |
| 0.25 |
| 0.38 |
| ||
Net increase in stockholders’ equity |
| 0.80 |
| 1.16 |
| ||
|
|
|
|
|
| ||
Distributions from net investment income |
| (0.55 | ) | (0.53 | ) | ||
Distributions from net realized capital gains on securities |
| (0.19 | ) | (0.09 | ) | ||
Total distributions to stockholders |
| (0.74 | ) | (0.62 | ) | ||
|
|
|
|
|
| ||
Net asset value at end of period (1) |
| $ | 15.10 |
| $ | 14.97 |
|
|
|
|
|
|
| ||
Per share market value at end of period |
| $ | 16.93 |
| $ | 17.83 |
|
Total return based on market value (3) |
| 9.96 | % | (5.04 | )% | ||
Total return based on net asset value (4) |
| 5.33 | % | 6.18 | % | ||
Shares outstanding at end of period |
| 38,207,254 |
| 23,168,595 |
| ||
|
|
|
|
|
| ||
Ratio/Supplemental Data: |
|
|
|
|
| ||
Net assets at end of period |
| $ | 576,984,134 |
| $ | 346,932,940 |
|
Ratio of operating expenses to average net assets (5) (6) |
| 8.55 | % | 4.55 | % | ||
Ratio of net investment income to average net assets (5) (7) |
| 8.78 | % | 6.98 | % | ||
Portfolio turnover rate (5) |
| 40 | % | 43 | % |
(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 six months ended June 30, 2006, the total return based on market value equals the increase of the ending market value at June 30, 2006 of $16.93 per share over the ending market value at December 31, 2005 of $16.07, plus the declared dividend of $0.38 per share for holders of record on June 15, 2006 and the declared dividend of $0.36 per share for holders of record on March 24, 2006, divided by the market value at December 31, 2005. For the six months ended June 30, 2005, the total return based on market value equals the decrease of the ending market value at June 30, 2005 of $17.83 per share over the ending market value at December 31, 2004 of $19.43, plus the declared dividend of $0.30 per share for holders of record on March 7, 2005 and the declared dividend of $0.32 per share for holders of record on June 30, 2005, divided by the market value at December 31, 2004. 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 six months ended June 30, 2006, the total return based on net asset value equals the change in net asset value during the period plus the declared dividend of $0.38 per share for holders of record on June 15, 2006 and the declared dividend of $0.36 per share for holders of record on March 24, 2006, divided by the beginning net asset value during the period. The calculation was adjusted for shares issued in connection with dividend reinvestment plan. For the six months ended June 30, 2005, the total return based on net asset value equals the change in net asset value during the period plus the declared dividend of $0.30 per share for holders of record on March 7, 2005 and the declared dividend of $0.32 per share for holders of record on June 30, 2005, divided by the beginning net asset value during the period. Total return based on net asset value is not annualized. The Company’s performance changes over time and currently may be different than that shown. Past performance is no guarantee of future results.
(5) The ratios reflect an annualized amount.
(6) For the six months ended June 30, 2006, the ratio of operating expenses to average net assets consisted of 1.97% of base management fees, 3.44% of incentive management fees, 2.27% of the cost of borrowing and other operating expenses of 0.87%. For the six months ended June 30, 2005, the ratio of operating expenses to average net assets consisted of 1.38% of base management fees, 1.55% of incentive management fees, 0.43% of the cost of borrowing and other operating expenses of 1.18%. These ratios reflect annualized amounts.
(7) The ratio of net investment income to average net assets excludes income taxes related to realized gains.
25
13. IMPACT OF NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) 123R, “Share Based Payment,” which requires companies to recognize in the statement of operations the grant date fair value of stock options and other equity based compensation issued to employees. SFAS 123R is effective for annual periods beginning after June 15, 2005. As the Company does not have any options or equity based compensation plans, there was no impact from the adoption of SFAS 123R.
14. SUBSEQUENT EVENTS
On July 7, 2006, through our newly formed, wholly owned Delaware subsidiary, ARCC CLO 2006 LLC (“ARCC CLO”), we completed a $400.0 million debt securitization where approximately $314.0 million principal amount of asset-backed notes (including $50.0 million revolving notes that have not been drawn down as of the date of this report) (the ”Offered Notes”) were issued to third parties and secured by a pool of middle market loans that have been purchased or originated by the Company. We retained approximately $86.0 million of certain BBB and non-rated securities in the debt securitization. The blended pricing of the Offered Notes, excluding fees, is approximately 3 month LIBOR plus 34 basis points. The securitization is an on-balance-sheet financing for the Company.
The classes, amounts, ratings and interest rates (expressed as a spread to LIBOR) of the Offered Notes are:
Class |
| Amount |
| Rating |
| LIBOR Spread |
|
| |
A-1A |
| $ | 75 |
| AAA/Aaa |
| 25 |
|
|
A-1A VFN |
| $ | 50 | (1) | AAA/Aaa |
| 28 |
|
|
A-1B |
| $ | 14 |
| AAA/Aaa |
| 37 |
|
|
A-2A |
| $ | 75 |
| AAA/Aaa |
| 22 |
|
|
A-2B |
| $ | 33 |
| AAA/Aaa |
| 35 |
|
|
B |
| $ | 23 |
| AA/Aa2 |
| 43 |
|
|
C |
| $ | 44 |
| A/A2 |
| 70 |
|
|
|
|
|
|
|
|
|
|
| |
Total |
| $ | 314 |
|
|
|
|
|
|
(1) Revolving class, none of which was drawn down as of the date of this report.
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 currently totaling $308.1 million as of the closing date, which were sold to the trust by the Company, the originator and servicer of the assets. Additional commercial loans will be purchased by the trust from the Company primarily using the proceeds from the Class A-1A VFN Notes. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.
26
Approximately $243.0 million of the total proceeds from the sale of the Offered Notes (not including the revolving notes that have not yet been drawn down) were used to pay down amounts outstanding under the CP Funding Facility and the Revolving Credit Facility.
On July 18, 2006, we completed a public add-on offering of 10,781,250 shares of common stock (including the underwriters’ overallotment of 1,406,250 shares) at $15.67 per share, less an underwriting discount and commissions totaling $0.58 per share. Total proceeds received from the add-on offering, net of the underwriters’ discount and offering costs, were approximately $162.2 million.
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The information contained in this section should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this quarterly report. In addition, some of the statements in this report constitute forward-looking statements, which relate to future events or the future performance or financial condition of Ares Capital Corporation (the “Company,” “ARCC,” “we,” “us” and “our”). The forward-looking statements contained in this report involve risks and uncertainties, including statements as to:
· our future operating results;
· our business prospects and the prospects of our portfolio companies;
· the impact of investments that we expect to make;
· our contractual arrangements and relationships with third parties;
· the dependence of our future success on the general economy and its impact on the industries in which we invest;
· the ability of our portfolio companies to achieve their objectives;
· our expected financings and investments;
· the adequacy of our cash resources and working capital;
· the timing of cash flows, if any, from the operations of our portfolio companies; and
· the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments.
We use words such as “anticipates,” “believes,” “expects,” “intends,” “will,” “should,” “may” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason. We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we 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.
OVERVIEW
We are a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland that is regulated as a business development company (a “BDC”) under the Investment Company Act of 1940 (“1940 Act”). We were founded on April 16, 2004 and were initially funded on June 23, 2004 and on October 8, 2004, completed our initial public offering (the “IPO”).
Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and long-term mezzanine debt, which in some cases may include an equity component, and, to a lesser extent, in equity investments in private U.S. middle market companies.
We are externally managed by Ares Capital Management LLC (the “Investment Adviser”), an affiliate of Ares Management LLC, an independent Los Angeles based firm that manages investment funds. Ares Technical Administration LLC (“Ares Administration”), an affiliate of Ares Management LLC, provides the administrative services necessary for us to operate.
28
As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less.
We have elected to be treated as a regulated investment company, or a RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. Pursuant to these elections, we generally will not have to pay corporate-level taxes on any income that we distribute to our stockholders.
PORTFOLIO AND INVESTMENT ACTIVITY
For the three months ended June 30, 2006, we issued 16 new commitments in an aggregate amount of $267.5 million ($194.0 million to new portfolio companies and $73.5 million to existing portfolio companies) compared to nine new commitments in an aggregate amount of $114.8 million ($105.6 million to new portfolio companies and $9.2 million to existing portfolio companies) for the three months ended June 30, 2005. During the three months ended June 30, 2006, we funded $240.7 million of such commitments ($167.2 million to new portfolio companies and $73.5 million to existing portfolio companies) compared to $110.3 million of commitments ($101.1 million to new portfolio companies and $9.2 million to existing portfolio companies) for the three months ended June 30, 2005. We have remaining contractual obligations for $26.8 million with respect to commitments funded as of June 30, 2006. The weighted average yield of new income producing equity securities and debt funded in connection with investments purchased during the three months ended June 30, 2006 and June 30, 2005 was approximately 12.25% and 9.71%, respectively (computed as (a) annual stated interest rate yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt divided by (b) total income producing equity securities and debt at fair value).
For the three months ended June 30, 2006, the Company purchased (A) $152.3 million aggregate principal amount of senior term debt, (B) $72.0 million aggregate principal amount of senior subordinated debt and (C) $30.8 million of investments in equity securities. For the three months ended June 30, 2005, the Company purchased (1) $82.9 million aggregate principal amount of senior term debt, (2) $10.0 million aggregate principal amount of senior subordinated debt, (3) $12.2 million aggregate principal amount of senior notes and (4) $5.2 million of investments in equity securities.
During the three months ended June 30, 2006, (A) $45.7 million aggregate principal amount of senior term debt and (B) $9.0 million aggregate principal amount of collateralized debt obligation notes were redeemed, and (C) $54.4 million of investments in equity securities were sold. As of June 30, 2006, the Company held investments in 50 portfolio companies as compared to 38 portfolio companies as of December 31, 2005. During the three months ended June 30, 2005, (1) $27.6 million aggregate principal amount of senior term debt and (2) $5.3 million aggregate principal amount of senior subordinated debt were redeemed, and (3) $3.2 million of investments in equity securities were sold.
The Investment Adviser employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, we grade all loans on a scale of 1 to 4 no less frequently than quarterly. This system is intended to reflect the performance of the borrower’s business, the collateral coverage of the loans and other factors considered relevant. Under this system, loans with a grade of 4 involve the least amount of risk in our portfolio. The borrower is performing above expectations and the trends and risk factors are generally favorable. Loans graded 3 involve a level of risk that is similar to the risk at the time of origination. The borrower is performing as expected and the risk factors are neutral to favorable. All new loans are initially graded 3. Loans graded 2 involve a borrower performing below expectations and indicates that the loan’s risk has increased materially since origination. The borrower is generally out of compliance with debt covenants, however, loan payments are generally not more than 120 days past due. For loans graded 2, we increase procedures to monitor the borrower. A loan grade of 1 indicates that the borrower is performing materially below expectations and that the loan risk has substantially increased since origination. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Loans graded 1 are not anticipated to be repaid in full.
29
We believe that as of June 30, 2006, the weighted average investment grade of the debt in our portfolio is 3.0 and the weighted average yield of such debt and income producing equity securities is approximately 12.42% (computed as (a) annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt, divided by (b) total income producing equity securities and debt at fair value). As of June 30, 2006, the weighted average yield on our entire portfolio was 11.63%. The weighted average yield on our senior term debt, senior subordinated debt and income producing equity securities was 11.67%, 14.51% and 10.57%, respectively. Of the senior term debt, the weighted average yield attributable to first lien senior term debt and second lien senior term debt was 11.10% and 12.32%, respectively.
As of December 31, 2005, the weighted average investment grade of the debt in our portfolio was 3.1 and the weighted average yield of such debt and income producing equity securities was approximately 11.25% (computed as (a) annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt, divided by (b) total income producing equity securities and debt at fair value). As of December 31, 2005, the weighted average yield on our entire portfolio was 10.88%. The weighted average yield on our senior term debt, senior subordinated debt and income producing equity securities was 10.56%, 14.71% and 8.82%, respectively. Of the senior term debt, the weighted average yield attributable to first lien senior term debt and second lien senior term debt was 9.38% and 11.49%, respectively.
RESULTS OF OPERATIONS
For the three and six months ended June 30, 2006 and June 30, 2005
Operating results for the three and six months ended June 30, 2006 and June 30, 2005 are as follows:
|
| For the Three Months |
| For the Six Months |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Total Investment Income |
| $ | 30,489,751 |
| $ | 9,601,615 |
| $ | 50,681,056 |
| $ | 15,352,207 |
|
Total Expenses |
| 16,225,221 |
| 3,833,481 |
| 24,516,110 |
| 6,054,244 |
| ||||
Net Investment Income Before Income Taxes |
| 14,264,530 |
| 5,768,134 |
| 26,164,946 |
| 9,297,963 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income Tax Expense, Including Excise Tax |
| 4,971,635 |
| — |
| 5,180,515 |
| — |
| ||||
Net Investment Income |
| 9,292,895 |
| 5,768,134 |
| 20,984,431 |
| 9,297,963 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Realized Gain |
| 23,879,988 |
| 6,745,382 |
| 24,490,874 |
| 7,154,412 |
| ||||
Net Unrealized Loss |
| (16,480,203 | ) | (4,911,260 | ) | (14,939,591 | ) | (346,213 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Increase in Stockholders’ Equity Resulting From Operations |
| $ | 16,692,680 |
| $ | 7,602,256 |
| $ | 30,535,714 |
| $ | 16,106,162 |
|
Investment Income
For the three months ended June 30, 2006, total investment income increased $20.9 million, or 218%, over the three months ended June 30, 2005. For the three months ended June 30, 2006, total investment income consisted of $23.5 million in interest income from investments, $1.2 million in dividend income, $5.3 million in capital structuring service fees, $352,000 in other income and $200,000 in interest income from cash and cash equivalents. Interest income from investments increased $16.8 million, or 249%, to $23.5 million for the three months ended June 30, 2006 from $6.7 million for the comparable period in 2005. The increase in interest income from investments was primarily due to the increase in the size of the portfolio. The average investments, at fair value, for the quarter increased from $259.2 million in the three months ended June 30, 2005 to $818.1 million in the comparable period in 2006. Capital structuring service fees increased $3.8 million, or 253%, to $5.3 million for the three months ended June 30, 2006 from $1.5 million for the comparable period in 2005. The increase in capital structuring service fees was primarily due to the increased number of originations. The number of funded
30
commitments increased from nine during the three months ended June 30, 2005 to 15 during the comparable period in 2006.
For the six months ended June 30, 2006, total investment income increased $35.3 million, or 230%, over the six months ended June 30, 2005. For the six months ended June 30, 2006, total investment income consisted of $41.0 million in interest income from investments, $7.6 million in capital structuring service fees, $454,000 in other income and $431,000 in interest income from cash and cash equivalents. Interest income from investments increased $29.1 million, or 243%, to $41.0 million for the six months ended June 30, 2006 from $12.0 million for the comparable period in 2005. The increase in interest income from investments was primarily due to the increase in the size of the portfolio. The average investments, at fair value, for the period increased from $227.7 million in the six months ended June 30, 2005 to $730.5 million in the comparable period in 2006. Capital structuring service fees increased $5.8 million, or 323%, to $7.6 million for the six months ended June 30, 2006 from $1.8 million for the comparable period in 2005. The increase in capital structuring service fees was primarily due to the increased number of originations. The number of funded commitments increased from 14 during the six months ended June 30, 2005 to 28 during the comparable period in 2006.
Expenses
For the three months ended June 30, 2006, total expenses increased $12.4 million, or 323%, over the three months ended June 30, 2005. Base management fees increased $2.1 million, or 203%, to $3.1 million for the three months ended June 30, 2006 from $1.0 million for the comparable period in 2005, primarily due to the increase in the size of the portfolio. Incentive fees related to pre-incentive fee net investment income increased $3.5 million, or 544%, to $4.1 million for the three months ended June 30, 2006 from $634,000 for the comparable period in 2005, primarily due to the increase in the size of the portfolio and the related increase in net investment income. Incentive fees related to realized gains increased $1.7 million, or 145%, to $2.9 million for the three months ended June 30, 2006 from $1.2 million for the comparable period in 2005, primarily due to higher net realized gains recognized during the three months ended June 30, 2006 as compared to the three months ended June 30, 2005. Net realized gains for the three months ended June 30, 2006 increased from $6.7 million during the three months ended June 30, 2005 to $23.9 million during the three months ended June 30, 2006. For the three months ended June 30, 2006, the net realized gains of $23.9 million were offset by $4.2 million in income tax expense related to realized gains and $3.7 million in unrealized depreciation in determining the incentive fees related to realized gains for the period. Interest expense and credit facility fees increased $4.3 million, or 6,826%, to $4.4 million for the three months ended June 30, 2006 from $63,000 for the comparable period in 2005, primarily due to the significant increase in the borrowings outstanding. There were no outstanding borrowings during the three months ended June 30, 2005 compared to average outstanding borrowings of $265.7 million in the comparable period in 2006. Amortization of debt issuance costs increased $346,000, or 527%, to $412,000 for the three months ended June 30, 2006 from $66,000 for the comparable period in 2005, primarily due to the additional debt issuance costs capitalized during the end of 2005 as a result of entering into the Revolving Credit Facility and increasing the borrowing capacity of the CP Funding Facility.
For the six months ended June 30, 2006, total expenses increased $18.5 million, or 305%, over the six months ended June 30, 2005. Base management fees increased $3.8 million, or 207%, to $5.6 million for the six months ended June 30, 2006 from $1.8 million for the comparable period in 2005, primarily due to the increase in the size of the portfolio. Incentive fees related to pre-incentive fee net investment income increased $6.1 million, or 704%, to $7.0 million for the six months ended June 30, 2006 from $871,000 for the comparable period in 2005, primarily due to the increase in the size of the portfolio and the related increase in net investment income. Incentive fees related to realized gains increased $1.7 million, or 139%, to $2.9 million for the six months ended June 30, 2006 from $1.2 million for the comparable period in 2005, primarily due to higher net realized gains recognized during the six months ended June 30, 2006 as compared to the six months ended June 30, 2005. Interest expense and credit facility fees increased $5.6 million, or 6,704%, to $5.7 million for the six months ended June 30, 2006 from $84,000 for the comparable period in 2005, primarily due to the significant increase in the borrowings outstanding. The average outstanding borrowings during the six months ended June 30, 2005 were $17.1 million compared to average outstanding borrowings of $171.6 million in the comparable period in 2006. Amortization of debt issuance costs increased $688,000, or 523%, to $819,000 for the six months ended June 30, 2006 from $131,000 for the comparable period in 2005, primarily due to the additional debt issuance costs capitalized during the end of 2005 as a result of entering into the Revolving Credit Facility and increasing the borrowing capacity of the CP Funding Facility.
31
Income Tax Expense, Including Excise Tax
The Company has qualified and elected and intends to continue to qualify and elect for the tax treatment applicable to regulated investment companies under Subchapter M of the Internal Revenue Code of 1986 (the “Code”), as amended, and, among other things, has made and intends to continue to make the requisite distributions to its stockholders which will relieve the Company from Federal income taxes.
Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three and six months ended June 30, 2006, a provision of approximately $727,000 and $826,000, respectively, was recorded for Federal excise tax.
Our wholly owned subsidiaries ACC and ACLLC are subject to Federal and state income taxes. For the three and six months ended June 30, 2006, we recorded a tax provision of approximately $4.2 million and $4.4 million, respectively, for these subsidiaries.
Net Unrealized Appreciation on Investments
For the three months ended June 30, 2006, the Company’s investments had a decrease in net unrealized appreciation of $16.5 million, which primarily related to the reversal of the prior period unrealized appreciation of $13.3 million for the investment in CICQ, LP, which was realized during the period, and the increase in unrealized depreciation of $3.7 million for the investment in Berkline/Benchcraft Holdings LLC, offset by the increase in unrealized appreciation in Varel Holdings, Inc of $1.0 million. For the three months ended June 30, 2005, the Company’s investments had a decrease in net unrealized appreciation of $4.9 million primarily related to the reversal of the prior period unrealized appreciation of $4.6 million for the investment in Reef Holdings, Inc., which was realized during the period.
For the six months ended June 30, 2006, the Company’s investments had a decrease in net unrealized appreciation of $14.9 million, which primarily related to the reversal of the prior period unrealized appreciation of $9.3 million for the investment in CICQ, LP, which was realized during the period, and the increase in unrealized depreciation of $6.1 million for the investments in Making Memories Wholesale, Inc. and Berkline/Benchcraft Holdings LLC. For the six months ended June 30, 2005, the Company’s investments had a decrease in net unrealized appreciation of $346,000.
Net Realized Gains/Losses
During the three months ended June 30, 2006, the Company had $133.1 million of sales and repayments resulting in $23.9 million of net realized gains. The most significant realized gains during the three months ended June 30, 2006 were the sales of the investments in CICQ, LP and United Site Services, Inc. of $18.6 million and $4.7 million, respectively. During the three months ended June 30, 2005, the Company had $45.8 million of sales and repayments resulting in $6.7 million of net realized gains. The most significant realized gains during the three months ended June 30, 2005 were the sales of the investments in Reef Holdings, Inc. and Billing Concepts, Inc. of $4.8 million and $1.9 million, respectively.
During the six months ended June 30, 2006, the Company had $170.4 million of sales and repayments resulting in $24.5 million of net realized gains. During the six months ended June 30, 2005, the Company had $55.6 million of sales and repayments resulting in $7.2 million of net realized gains.
Net Increase in Stockholders’ Equity Resulting From Operations
Net increase in stockholders’ equity resulting from operations for the three and six months ended June 30, 2006 was approximately $16.7 million and $30.5 million, respectively. Based on the weighted average shares outstanding during the three and six months ended June 30, 2006, our net increase in stockholders’ equity resulting from operations per common share was $0.44 and $0.80, respectively.
Net increase in stockholders’ equity resulting from operations for the three and six months ended June 30, 2005 was approximately $7.6 million and $16.1 million, respectively. Based on the weighted average shares outstanding during the three and six months ended June 30, 2005, our net increase in stockholders’ equity resulting from operations per common share was $0.33 and $0.91, respectively.
32
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company’s liquidity and capital resources were generated primarily from the remaining net proceeds of its initial public offering and subsequent add-on public offerings, advances from the CP Funding Facility and the Revolving Credit Facility, as well as cash flows from operations. We received approximately $156.4 million in proceeds net of underwriting and offering costs (net of $2.5 million in underwriting costs originally paid by the Investment Adviser and subsequently reimbursed by the Company in 2006) from our October 8, 2004 initial public offering, approximately $183.9 million in proceeds net of underwriting and offering costs from our March 23, 2005 add-on public offering, $213.5 million in proceeds net of underwriting and offering costs from our October 18, 2005 add-on public offering and $162.2 million in proceeds net of underwriting and offering costs from our July 18, 2006 add-on public offering.
On July 7, 2006, through our newly formed, wholly owned Delaware subsidiary, ARCC CLO 2006 LLC (“ARCC CLO”), we completed a $400.0 million debt securitization where approximately $314.0 million principal amount of asset-backed notes (including $50.0 million revolving notes that have not been drawn down as of the date of this report) (the ”Offered Notes”) were issued to third parties and secured by a pool of middle market loans that have been purchased or originated by the Company. We retained approximately $86.0 million of certain BBB and non-rated securities in the debt securitization. The blended pricing of the Offered Notes, excluding fees, is approximately 3 month LIBOR plus 34 basis points. The securitization is an on-balance-sheet financing for the Company.
A portion of the proceeds from our public offerings and the securitization were used to repay outstanding indebtedness under the CP Funding Facility and the Revolving Credit Facility. The remaining unused portion of the proceeds from our public offerings has been used to fund investments in portfolio companies in accordance with our investment objectives and strategies.
As of June 30, 2006 and December 31, 2005, the fair value of investments and cash and cash equivalents, and the outstanding borrowings under the CP Funding Facility and the Revolving Credit Facility were as follows:
| June 30, 2006 |
| December 31, 2005 |
| |||
Cash and cash equivalents |
| $ | 44,844,697 |
| $ | 16,613,334 |
|
Senior term debt |
| 586,139,016 |
| 338,467,061 |
| ||
Senior notes |
| 10,000,000 |
| 10,000,000 |
| ||
Senior subordinated debt |
| 217,764,213 |
| 130,042,698 |
| ||
Collateralized debt obligations |
| 7,559,577 |
| 17,386,561 |
| ||
Equity securities |
| 56,697,825 |
| 90,072,055 |
| ||
Total |
| $ | 923,005,328 |
| $ | 602,581,709 |
|
Outstanding borrowings |
| $ | 345,200,000 |
| $ | 18,000,000 |
|
The available amount for borrowing under the CP Funding Facility is $350.0 million (see Note 7 to the consolidated financial statements for more detail of the CP Funding Facility arrangement). As of June 30, 2006, there was $101.2 million outstanding under the CP Funding Facility. The CP Funding Facility expires on November 1, 2006 unless extended prior to such date with the consent of the lenders. The available amount for borrowing under the Revolving Credit Facility is $250 million (see Note 7 to the consolidated financial statements for more detail of the Revolving Credit Facility arrangement). As of June 30, 2006, there was $244.0 million outstanding under the Revolving Credit Facility. The Revolving Credit Facility expires on December 28, 2010.
For the six months ending June 30, 2006, average total assets was $766.6 million.
33
OFF BALANCE SHEET ARRANGEMENTS
As of June 30, 2006, the Company had committed to make a total of approximately $84.0 million of investments in various revolving senior secured loans. As of June 30, 2006, $50.4 million was unfunded. Included within the $84.0 million commitment in revolving secured loans is a commitment to issue up to $3.8 million in standby letters of credit through a financial intermediary on behalf of certain portfolio companies. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio companies were to default on their related payment obligations. As of June 30, 2006, the Company had $2.8 million in standby letters of credit issued and outstanding on behalf of the portfolio companies, of which no amounts were recorded as a liability. Of these letters of credit, $2.3 million expire on September 30, 2006 and $500,000 expire on July 31, 2007. These letters of credit may be extended under substantially similar terms for additional one-year terms at the Company’s option until the revolving line of credit, under which the letters of credit were issued, matures on September 30, 2011.
As of June 30, 2006, the Company was subject to a subscription agreement to fund up to $10.0 million of equity commitments in a private equity investment partnership. As of June 30, 2006, there were no amounts funded in this partnership.
As of December 31, 2005, the Company had committed to make a total of approximately $43.0 million of investments in various revolving senior secured loans. As of December 31, 2005, $28.8 million was unfunded. Included within the $43.0 million commitment in revolving secured loans is a commitment to issue up to $3.2 million in standby letters of credit through a financial intermediary on behalf of a portfolio company. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio company was to default on its related payment obligations. As of December 31, 2005, the Company had $2.2 million in standby letters of credit issued and outstanding on behalf of the portfolio company, of which no amounts were recorded as a liability.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are subject to financial market risks, including changes in interest rates and the valuations of our investment portfolio.
Interest Rate Risk
As of June 30, 2006, approximately 32% of the investments at fair value in our portfolio were at fixed rates while approximately 60% were at variable rates. In addition, the CP Funding Facility and the Revolving Credit Facility are variable rate borrowing facilities.
To illustrate the potential impact of changes in interest rates, we have performed the following analysis based on our June 30, 2006 balance sheet and assuming no changes in our investment and borrowing structure. Under this analysis, a 100 basis point increase in the various base rates would result in an increase in interest income of approximately $5,400,000 and an increase in interest expense of $3,452,000 over the next 12 months. A 100 basis point decrease in the various base rates would result in a decrease in interest income of approximately $5,400,000 and a decrease in interest expense of $3,452,000 over the next 12 months.
On January 7, 2005, we entered into a costless collar agreement in order to manage the exposure to changing interest rates related to the Company’s fixed rate investments. The costless collar agreement was for a notional amount of $20 million, has a cap of 6.5%, a floor of 2.72% and matures in 2008. The costless collar agreement allows us to receive an interest payment when the 3-month LIBOR exceeds 6.5% and obligates us to pay an interest payment when the 3-month LIBOR is less than 2.72%. The costless collar resets quarterly based on the 3-month LIBOR. As of June 30, 2006, the 3-month LIBOR was 5.48%. As of June 30, 2006, these derivatives had no fair value.
While hedging activities may mitigate our exposure to adverse fluctuations in interest rates, certain hedging transactions that we may enter into in the future, such as interest rate swap agreements, may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio investments.
34
Portfolio Valuation
Investments for which market quotations are readily available are valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued at fair value as determined in good faith by our board of directors based on the input of our investment adviser and audit committee. In addition, the board of directors currently receives input from an independent valuation firm that has been engaged at the direction of the board to value each portfolio security at least once during a trailing 12 month period. The valuation process is conducted at the end of each fiscal quarter, with approximately a quarter of our portfolio companies subject to valuation by the independent valuation firm each quarter. The types of factors that the board may take into account in fair value pricing of our investments include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors.
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our private equity valuation. Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments, and the differences could be material.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them of material information relating to the Company that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.
There have been no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
35
We are not a defendant in any pending legal proceeding, and no such proceedings are known to be contemplated.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We did not sell any securities during the period covered in this report that were not registered under the Securities Act.
We did not repurchase any shares issued during the period covered in this report.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 30, 2006, we held our Annual Meeting of Stockholders in Los Angeles, California. Stockholders voted on three matters; the substance of these matters and the results of the voting of each such matter are described below.
1. Election of Directors: Stockholders elected two Class II directors of the Company, who will each serve for three years, or until his successor is elected and qualified. Votes were cast as follows:
| For |
| Withheld |
| |
Robert L. Rosen |
| 25,438,258 |
| 1,023,959 |
|
Bennett Rosenthal |
| 25,198,779 |
| 1,263,438 |
|
The following directors are continuing as directors of the Company for their respective terms — Douglas E. Coltharp, Frank E. O’Bryan and Eric B. Siegel.
2. Ratification of the selection of KPMG LLP to serve as independent registered public accounting firm for the year ending December 31, 2006. Votes were cast as follows:
For |
| Against |
| Withheld |
|
25,888,408 |
| 441,467 |
| 132,342 |
|
3. Approval of an amended and restated investment advisory and management agreement between the Company and the Investment Adviser. Brokers cast 6,973,644 non-votes. The remaining votes were cast as follows:
For |
| Against |
| Withheld |
|
18,706,821 |
| 547,694 |
| 234,058 |
|
None.
36
EXHIBIT INDEX
Number |
| Description |
|
|
|
3.1 |
| Articles of Amendment and Restatement (1) |
|
|
|
3.2 |
| Amended and Restated Bylaws (1) |
|
|
|
4.1 |
| Form of Stock Certificate (2) |
|
|
|
10.1 |
| Amended and Restated Investment Advisory and Management Agreement between Ares Capital Corporation and Ares Capital Management LLC (3) |
|
|
|
10.2 |
| Sale and Servicing Agreement, dated as of July 7, 2006, among ARCC Commercial Loan Trust 2006, as issuer, ARCC CLO 2006 LLC, as trust depositor, Ares Capital Corporation, as originator and as servicer, U.S. Bank National Association, as trustee and as collateral administrator, Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services), as backup servicer, and Wilmington Trust Company, as owner trustee* |
|
|
|
10.3 |
| Commercial Loan Sale Agreement, dated as of July 7, 2006, between Ares Capital Corporation and ARCC CLO 2006 LLC* |
|
|
|
10.4 |
| Indenture, dated as of July 7, 2006, between ARCC Commercial Loan Trust 2006 and U.S. Bank National Association* |
|
|
|
10.5 |
| Amended and Restated Trust Agreement, dated as of July 7, 2006, among ARCC CLO 2006 LLC, Wilmington Trust Company and U.S. Bank National Association* |
|
|
|
10.6 |
| Collateral Administration Agreement, dated as of July 7, 2006, among ARCC Commercial Loan Trust 2006, Ares Capital Corporation and U.S. Bank National Association* |
|
|
|
10.7 |
| Master Participation Agreement, dated as of July 7, 2006, between Ares Capital CP Funding LLC and Ares Capital Corporation* |
|
|
|
10.8 |
| Class A-1A VFN Purchase Agreement, dated as of July 7, 2006, among ARCC Commercial Loan Trust 2006, U.S. Bank National Association and the other Class A-1A VFN noteholders party thereto* |
|
|
|
31.1 |
| Certification by President pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
|
31.2 |
| Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
|
|
|
32.1 |
| Certification by President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
* Filed herewith.
(1) Previously filed with the Registrant’s pre-effective Amendment No. 1 to the Registration Statement under the Securities Act of 1933, as amended, on Form N-2, filed on September 17, 2004.
(2) Previously filed with the Registrant’s pre-effective Amendment No. 2 to the Registration Statement under the Securities Act of 1933, as amended, on Form N-2, filed on September 28, 2004.
(3) Previously filed with the Registrant’s Form 8-K, filed on June 2, 2006.
37
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARES CAPITAL CORPORATION | |||
|
|
|
|
Dated: August 9, 2006 | By | /s/ Michael J. Arougheti | |
|
| Michael J. Arougheti | |
|
| President | |
|
|
|
|
| By | /s/ Daniel F. Nguyen | |
|
| Daniel F. Nguyen | |
|
| Chief Financial Officer |
38