Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

 

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

FOR THE FISCAL YEAR ENDED MARCH 31, 2009

OR

 

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

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER: 814-00646

 

 

APOLLO INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   52-2439556
(State of Incorporation)   (I.R.S. Employer Identification Number)

9 West 57th Street

New York, N.Y.

  10019
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (212) 515-3450

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

 

Title of Each Class   Name of Each Exchange on Which Registered

Common Stock, par value

$0.001 per share

  The NASDAQ Global Select Market

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

 

 

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

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

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

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

Large accelerated filer  x            Accelerated filer  ¨

Non-accelerated filer  ¨ (Do not check if a smaller reporting company)            Smaller reporting company  ¨

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

The aggregate market value of common stock held by non-affiliates of the Registrant on September 30, 2008 based on the closing price on that date of $17.05 on the NASDAQ Global Select Market was approximately $2.4 billion. For the purposes of calculating this amount only, all directors and executive officers of the Registrant have been treated as affiliates. There were 142,221,335 shares of the Registrant’s common stock outstanding as of May 26, 2009.

 

 

 


Table of Contents

APOLLO INVESTMENT CORPORATION

FORM 10-K

FOR THE FISCAL YEAR ENDED MARCH 31, 2009

TABLE OF CONTENTS

 

          Page
   PART I   

Item 1.

  

Business

   1

Item 1A.

  

Risk Factors

   9

Item 1B.

  

Unresolved Staff Comments

   23

Item 2.

  

Properties

   23

Item 3.

  

Legal Proceedings

   23

Item 4.

  

Submission of Matters to a Vote of Security Holders

   23
   PART II   

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   24

Item 6.

  

Selected Financial Data

   27

Item 7.

  

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

   28

Item 7A.

  

Quantitative and Qualitative Disclosures about Market Risk

   38

Item 8.

  

Financial Statements and Supplementary Data

   39

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   74

Item 9A.

  

Controls and Procedures

   74

Item 9B.

  

Other Information

   74
   PART III   

Item 10.

  

Directors and Executive Officers of the Registrant

   75

Item 11.

  

Executive Compensation

   78

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   79

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

   81

Item 14.

  

Principal Accountant Fees and Services

   81
   PART IV   

Item 15.

  

Exhibits and Financial Statement Schedules

   83
  

Signatures

   84


Table of Contents

PART I

Item 1. Business

Apollo Investment Corporation

Apollo Investment Corporation (“Apollo Investment”, the “Company” or “we”), a Maryland corporation organized on February 2, 2004, is a closed-end, externally managed, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). In addition, for tax purposes we have elected to be treated as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended.

Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in middle-market companies in the form of mezzanine and senior secured loans, as well as by making equity investments. From time to time, we may also invest in the securities of public companies as well as public companies whose securities are thinly traded.

Our portfolio is comprised primarily of investments in long-term subordinated debt, referred to as mezzanine debt, and senior secured loans of private middle-market companies, and from time to time includes equity interests such as common stock, preferred stock, warrants or options. In this Form 10-K, we use the term “middle-market” to refer to companies with annual revenues between $50 million and $2 billion. While our primary focus is to generate both current income and capital appreciation through investments in U.S. senior and subordinated loans, other debt securities and private equity, we may also invest a portion of the portfolio in opportunistic investments, including foreign securities.

Apollo Investment Management (“AIM”) is the investment adviser for the Company and an affiliate of Apollo Global Management, LLC (“AGM”). AGM and other affiliates manage other funds that may have investment mandates that are similar, in whole or in part, with ours. AIM and its affiliates may determine that an investment is appropriate both for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, AIM may determine that we should invest on a side-by-side basis with one or more other funds. We may make all such investments subject to compliance with applicable regulations and interpretations, and our allocation procedures. In certain circumstances negotiated co-investments may be made only if we receive an order from the SEC permitting us to do so. There can be no assurance that any such order will be obtained.

During our fiscal year ended March 31, 2009, we invested $435 million across 12 new and 13 existing portfolio companies. This compares to investing $1.8 billion in 27 new and 15 existing portfolio companies for the previous fiscal year ended March 31, 2008. Investments sold or prepaid during the fiscal year ended March 31, 2009 totaled $340 million versus $714 million for the fiscal year ended March 31, 2008. Total invested capital since our initial public offering in April 2004 through March 31, 2009 is $5.6 billion. The weighted average yields on our senior secured loan portfolio, subordinated debt portfolio and total debt portfolio at our current cost basis were 8.2%, 13.2% and 11.7%, respectively, at March 31, 2009. At March 31, 2008, the yields were 10.0%, 12.8%, and 12.0%, respectively.

Our targeted investment size typically ranges between $20 million and $250 million, although this investment size may vary proportionately as the size of our available capital base changes. At March 31, 2009, our net portfolio consisted of 72 portfolio companies and was invested 27% in senior secured loans, 59% in subordinated debt, 4% in preferred equity and 10% in common equity and warrants measured at fair value versus 71 portfolio companies invested 22% in senior secured loans, 57% in subordinated debt, 6% in preferred equity and 15% in common equity and warrants at March 31, 2008.

Since the initial public offering of Apollo Investment in April 2004 and through March 31, 2009, invested capital totals $5.6 billion in 124 portfolio companies. Over the same period, Apollo Investment has also completed transactions with more than 85 different financial sponsors.

 

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Senior secured loans and European mezzanine loans typically accrue interest at variable rates determined on the basis of a benchmark: LIBOR, EURIBOR, GBP LIBOR, or the prime rate, with stated maturities at origination that typically range from 5 to 10 years. While subordinated debt issued within the United States will typically accrue interest at fixed rates, some of these investments may include zero-coupon, PIK and/or step bonds that accrue income on a constant yield to call or maturity basis. At March 31, 2009, 69% or $1.5 billion of our interest-bearing investment portfolio is fixed rate debt and 31% or $0.7 billion is floating rate debt, measured at fair value. At March 31, 2008, 62% or $1.6 billion of our interest-bearing investment portfolio was fixed rate debt and 38% or $1.0 billion was floating rate debt.

Apollo Investment Management

AIM, our investment adviser, is led by a dedicated team of investment professionals. The investment committee of AIM currently consists of John J. Hannan, the Chairman of our board of directors; James C. Zelter, our Chief Executive Officer and a Vice President of the general partner of AIM; Patrick J. Dalton, our President and Chief Operating Officer of Apollo Investment and a Vice President and the Chief Investment Officer of the general partner of AIM; Rajay Bagaria, a Partner of AIM; and Justin Sendak, a Partner of AIM. The composition of the investment committee of AIM may change from time to time. AIM draws upon AGM’s 19 year history and benefits from the broader firm’s significant capital markets, trading and research expertise developed through investments in many core sectors in over 150 companies since inception.

Apollo Investment Administration

In addition to furnishing us with office facilities, equipment, and clerical, bookkeeping and record keeping services, Apollo Investment Administration (“AIA” or “Apollo Administration”) also oversees our financial records as well as the preparation of our reports to stockholders and reports filed with the SEC. AIA oversees the determination and publication of our net asset value, oversees the preparation and filing of our tax returns, and generally monitors the payment of our expenses and the performance of administrative and professional services rendered to us by others. Furthermore, AIA provides on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance.

Operating and Regulatory Structure

Our investment activities are managed by AIM and supervised by our board of directors, a majority of whom are independent of Apollo and its affiliates. AIM is an investment adviser that is registered under the Investment Advisers Act of 1940. Under our investment advisory and management agreement, we pay AIM an annual base management fee based on our gross assets as well as an incentive fee.

As a business development company, we are required to comply with certain regulatory requirements. Also, while we are permitted to finance investments using debt, our ability to use debt is limited in certain significant respects. We have elected to be treated for federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Code.

Investments

Apollo Investment seeks to create a portfolio that includes primarily debt investments in mezzanine and senior secured loans and, to a lesser extent, private equity investments by generally investing approximately $20 million to $250 million of capital, on average, in these securities of middle-market companies. The average investment size will vary as the size of our capital base varies. Our target portfolio will generally be more heavily weighted toward mezzanine loans. Structurally, mezzanine loans usually rank subordinate in priority of payment to senior debt, such as senior bank debt, and are often unsecured. As such, other creditors may rank senior to us in the event of an insolvency. However, mezzanine loans rank senior to common and preferred equity in a borrowers’ capital structure. Mezzanine loans may have a fixed or floating interest rate. Additional upside can be generated

 

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from upfront fees, call protection including call premiums, equity co-investments or warrants. We believe that mezzanine loans offer an attractive investment opportunity based upon their historic returns. Additionally, we may acquire investments in the secondary market if we believe the risk-adjusted returns are attractive.

Our principal focus is to provide capital to middle-market companies in a variety of industries. We generally seek to target companies that generate positive free cash flows.

The following is a representative list of the industries in which we have invested:

 

• Building materials    • Education    • Lodging/Leisure/Resorts
• Business services    • Energy/Utilities    • Manufacturing/Basic industry
• Cable television    • Environmental services    • Media
• Chemicals    • Financial services    • Packaging
• Communications    • Food    • Printing and publishing
• Consumer products    • Government services    • Restaurants
• Distribution    • Healthcare    • Transportation

We may also invest in other industries if we are presented with attractive opportunities.

In an effort to increase our returns and the number of loans that we can make, we may in the future seek to securitize our loans. To securitize loans, we may create a wholly owned subsidiary and contribute a pool of loans to the subsidiary. We may sell interests in the subsidiary on a non-recourse basis to purchasers whom we would expect to be willing to accept a lower interest rate to invest in investment-grade loan pools. We may use the proceeds of such sales to pay down bank debt or to fund additional investments. We may also invest through special purpose entities or other arrangements, including total return swaps and repurchase agreements, in order to obtain non-recourse financing or for other purposes.

We may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds. We may also co-invest on a concurrent basis with affiliates of Apollo Investment, subject to compliance with applicable regulations and our allocation procedures. Certain types of negotiated co-investments may be made only if we receive an order from the SEC permitting us to do so. There can be no assurance that any such order will be obtained.

At March 31, 2009, our net portfolio consisted of 72 portfolio companies and was invested 27% in senior secured loans, 59% in subordinated debt, 4% in preferred equity and 10% in common equity and warrants measured at fair value. We expect that our portfolio will continue to include primarily mezzanine loans, and to a lesser extent, senior secured loans, and equity-related securities. In addition, we also expect to invest a portion of our portfolio in opportunistic investments, which are not our primary focus, but are intended to enhance our risk-adjusted returns to stockholders. These investments may include, but are not limited to, securities of public companies and debt and equity securities of companies located outside of the United States.

While our primary focus is to generate both current income and capital appreciation through investments in U.S. senior and subordinated loans, other debt securities and private equity, we may also invest a portion of the portfolio in opportunistic investments, including foreign securities.

 

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Listed below are our top ten portfolio companies and industries represented as a percentage of total assets for the years ended March 31, 2009 and 2008:

TOP TEN PORTFOLIO COMPANIES AND INDUSTRIES AS OF MARCH 31, 2009

 

PORTFOLIO COMPANY

   % of Total Assets     INDUSTRY    % of Total Assets  

Asurion Corporation

   4.8 %   Education    7.4 %

First Data Corporation

   4.5 %   Healthcare    6.5 %

TL Acquisitions, Inc. (Thomson Learning)

   3.8 %   Financial Services    6.2 %

Gray Wireline Service, Inc.

   3.2 %   Diversified Service    5.8 %

Ceridian Corp.

   2.9 %   Insurance    5.6 %

Ranpak Corporation

   2.9 %   Oil & Gas    4.9 %

Playpower Holdings Inc.

   2.8 %   Consumer Products    4.1 %

Fleetpride Corporation

   2.8 %   Transportation    3.9 %

Grand Prix Holdings, LLC (Innkeepers USA)

   2.7 %   Retail    3.8 %

Quality Home Brands Holdings

   2.6 %   Industrial    3.6 %

TOP TEN PORTFOLIO COMPANIES AND INDUSTRIES AS OF MARCH 31, 2008

 

PORTFOLIO COMPANY

   % of Total Assets     INDUSTRY    % of Total Assets  

Grand Prix Holdings, LLC (Innkeepers USA)

   6.6 %   Hotels, Motels,
Inns and Gaming
   6.6 %

First Data Corporation

   4.9 %   Financial Services    6.1 %

Asurion Corporation

   3.1 %   Oil & Gas    5.5 %

TL Acquisitions, Inc. (Thomson Learning)

   2.5 %   Education    4.9 %

GS Prysmian Co-Invest L.P. (Prysmian Cables)

   2.5 %   Business Services    4.3 %

Gray Wireline Service, Inc.

   2.2 %   Industrial    4.0 %

Associated Materials, Inc.

   2.1 %   Retail    3.8 %

Fleetpride Corporation

   2.1 %   Insurance    3.5 %

Quality Home Brands Holdings

   2.0 %   Diversified
Service
   3.4 %

Ranpak Corporation

   2.0 %   Environmental    3.3 %

Listed below is the geographic breakdown of the portfolio as of March 31, 2009 and 2008:

 

Geographic Region

 

% of Portfolio

at March 31, 2009

 

Geographic Region

 

% of Portfolio

at March 31, 2008

United States   90.9%   United States   86.8%
Canada   1.8%   Canada   2.1%
Western Europe   7.3%   Western Europe   11.1%
         
  100.0%     100.0%
         

Investment selection & due diligence

We are committed to a value oriented philosophy and will commit resources to managing risk to the Company’s capital. Our investment adviser conducts due diligence on prospective portfolio companies. In conducting their due diligence, our adviser uses information provided by the company and its management team, publicly available information, as well as information from their extensive relationships with former and current management teams, consultants, competitors and investment bankers and the direct experience of the senior partners of our affiliates.

 

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Our investment adviser’s due diligence will typically include:

 

   

review of historical and prospective financial information;

 

   

on-site visits;

 

   

interviews with management, employees, customers and vendors of the potential portfolio company;

 

   

review of loan documents;

 

   

background checks; and

 

   

research relating to the company’s management, industry, markets, products and services, and competitors.

Upon the completion of due diligence and a decision to proceed with an investment in a company, the professionals leading the investment present the investment opportunity to our investment adviser’s investment committee, which determines whether to pursue the potential investment. Additional due diligence with respect to any investment may be conducted on our behalf by attorneys and independent accountants (retained by such portfolio company) prior to the closing of the investment, as well as other outside advisers, as appropriate.

Investment structure

Once we have determined that a prospective portfolio company is suitable for investment, we work with the management of that company and its other capital providers, including senior, junior and equity capital providers, to structure an investment.

We seek to structure our mezzanine investments primarily as unsecured, subordinated loans that provide for relatively high interest rates that provide us with significant current interest income. These loans typically have interest-only payments in the early years, with amortization of principal deferred to the later years of the mezzanine loans. In some cases, we may enter into loans that, by their terms, convert into equity or additional debt securities or defer payments of interest after our investment. Also, in some cases our mezzanine loans may be collateralized by a subordinated lien on some or all of the assets of the borrower. Typically, our mezzanine loans have maturities of five to ten years.

We also seek to invest in portfolio companies in the form of senior secured loans. We expect these senior secured loans to have terms of three to ten years and may provide for deferred interest payments over the term of the loan. We generally seek to obtain security interests in the assets of our portfolio companies that serve as collateral in support of the repayment of these loans. This collateral may take the form of first or second priority liens on the assets of a portfolio company.

In the case of our mezzanine and senior secured loan investments, we seek to tailor the terms of the investment to the facts and circumstances of the transaction and the prospective portfolio company, negotiating a structure that protects our rights and manages our risk while creating incentives for the portfolio company to achieve its business plan and improve its profitability. For example, in addition to seeking a senior position in the capital structure of our portfolio companies, we seek to limit the downside potential of our investments by:

 

   

requiring an expected total return on our investments (including both interest and potential equity appreciation) that compensates us for credit risk;

 

   

generally incorporating call protection into the investment structure; and

 

   

negotiating covenants and information rights in connection with our investments that afford our portfolio companies as much flexibility in managing their businesses as possible, consistent with our goal of preserving our capital. Such restrictions may include affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights, including either observation or participation rights.

 

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

We expect to hold most of our investments to maturity or repayment, but we may sell certain of our investments earlier, including, if a liquidity event takes place such as the sale or recapitalization or worsening of credit quality of a portfolio company.

Managerial assistance

As a business development company, we offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may receive fees for these services. Apollo Administration provides such managerial assistance on our behalf to portfolio companies that request this assistance.

Ongoing relationships with portfolio companies

Monitoring

Apollo Investment Management monitors our portfolio companies on an ongoing basis. AIM monitors the financial trends of each portfolio company to determine if each is meeting its respective business plans and to assess the appropriate course of action for each company.

AIM has several methods of evaluating and monitoring the performance and fair value of our investments, which can include, but are not limited to, the following:

 

   

Assessment of success in adhering to portfolio company’s business plan and compliance with covenants;

 

   

Periodic and regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and accomplishments;

 

   

Comparisons to other portfolio companies in the industry;

 

   

Attendance at and participation in board meetings; and

 

   

Review of monthly and quarterly financial statements and financial projections for portfolio companies.

In addition to various risk management and monitoring tools, AIM also uses an investment rating system to characterize and monitor our expected level of returns on each investment in our portfolio.

 

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We use an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:

 

Investment
Rating

  

Summary Description

1    Capital gain expected
2    Full return of principal and interest or dividend expected, with the portfolio company performing in accordance with our analysis of its business
3    Full return of principal and interest or dividend expected, but the portfolio company requires closer monitoring
4    Some loss of interest, dividend or capital appreciation expected, but still expecting an overall positive internal rate of return on the investment
5    Loss of interest or dividend and some loss of principal investment expected, which would result in an overall negative internal rate of return on the investment

AIM monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, AIM reviews these investment ratings on a quarterly basis, and our board of directors affirms such ratings.

Valuation Process

The following is a description of the steps we take each quarter to determine the value of our portfolio. Many of our portfolio investments are recorded at fair value as determined in good faith by or under the direction of our board of directors pursuant to a written valuation policy and a consistently applied valuation process utilizing the input of our investment adviser, independent valuation firms and the audit committee. Investments for which market quotations are readily available are recorded in our financial statements at such market quotations if they are deemed to represent fair value. Market quotations may be deemed not to represent fair value where AIM believes that facts and circumstances applicable to an issuer, a seller or purchaser or the market for a particular security causes current market quotes not to reflect the fair value of the security, among other reasons. Examples of these events could include cases in which material events are announced after the close of the market on which a security is primarily traded, when a security trades infrequently causing a quoted purchase or sale price to become stale or in the event of a “fire sale” by a distressed seller.

With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our board of directors has approved a multi-step valuation process each quarter, as described below:

(1) our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our investment adviser responsible for the portfolio investment;

(2) preliminary valuation conclusions are then documented and discussed with senior management of our investment adviser;

(3) independent valuation firms engaged by our board of directors conduct independent appraisals and review our investment adviser’s preliminary valuations and make their own independent assessment;

(4) the audit committee of the board of directors reviews the preliminary valuation of our investment adviser and that of the independent valuation firm and responds to the valuation recommendation of the independent valuation firm to reflect any comments; and

(5) 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, the respective independent valuation firm and the audit committee.

 

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When we make investments that involve deferrals of interest payable to us, any increase in the value of the investment due to the accrual or receipt of payment of interest is allocated to the increase in the cost basis of the investment, rather than to capital appreciation or gain.

Competition

Our primary competitors in providing financing to middle-market companies include public and private funds, commercial and investment banks, commercial financing companies, and, to the extent they provide an alternative form of financing, private equity funds. Additionally, because competition for investment opportunities generally has increased among alternative investment vehicles, such as hedge funds, those entities have begun to invest in areas they have not traditionally invested in, including investments in middle-market companies. Some of our existing and potential competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than we. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company. We also expect to use the industry information of Apollo’s investment professionals to which we have access to assess investment risks and determine appropriate pricing for our investments in portfolio companies. In addition, we believe that the relationships of the senior managers of AIM and those of our affiliates enable us to learn about, and compete effectively for, financing opportunities with attractive middle-market companies in the industries in which we seek to invest.

Staffing

The Company has a chief financial officer and a chief compliance officer and, to the extent necessary, they have hired and will continue to hire additional personnel. These individuals are employees of Apollo Administration and perform their respective functions under the terms of the administration agreement. Certain of our other executive officers are managing partners of our investment adviser. Our day-to-day investment operations are managed by our investment adviser. AIM has hired and will continue to hire additional investment professionals in the future. In addition, we reimburse Apollo Administration for our allocable portion of expenses incurred by it in performing its obligations under the administration agreement, including rent and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect us. For example:

 

   

Pursuant to Rule 13a-14 of the 1934 Act, our Chief Executive Officer and Chief Financial Officer must certify the accuracy of the financial statements contained in our periodic reports;

 

   

Pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures;

 

   

Pursuant to Rule 13a-15 of the 1934 Act, our management must prepare a report regarding its assessment of our internal control over financial reporting, which must be audited by our independent registered public accounting firm; and

 

   

Pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the 1934 Act, our periodic reports must disclose whether there were significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.

You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is (http://www.sec.gov).

Our internet address is www.apolloic.com. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into this annual report on Form 10-K, and you should not consider information contained on our website to be part of this annual report on Form 10-K.

Item 1A. Risk Factors

Investing in Apollo Investment involves a number of significant risks related to our business, structure, investments and investment in our common stock. As a result, there can be no assurance that we will achieve our investment objective.

CERTAIN RISKS IN THE CURRENT ENVIRONMENT

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

We believe that beginning in 2007 and through 2008, the global capital markets were in a period of disruption as evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of certain major financial institutions and have remained as such through the date of this filing. Despite actions of the United States federal government and foreign governments, these events have contributed to worsening general economic conditions that are materially and adversely impacting the broader financial and credit markets and reducing the availability of debt and equity capital for the market as a whole and financial services firms in particular. These conditions could continue for a prolonged period of time or worsen in the future. While these conditions persist, we and other companies in the financial services sector may be required to, or may choose to, seek access to alternative markets for debt and equity capital. Equity capital may be difficult to raise because, subject to some limited exceptions, we are not generally able to issue and sell our common stock at a price below net asset value per share. In addition, the debt capital that will be available, if at all, may be at a higher cost, and on less favorable terms and conditions in the future. Conversely, our portfolio companies may not be able to service or refinance their debt, which could materially and adversely affect our financial condition as we would experience reduced income or even losses. The inability to raise capital and the risk of portfolio company defaults may have a negative effect on our business, financial condition and results of operations.

RISKS RELATING TO OUR BUSINESS AND STRUCTURE

We may suffer credit losses.

Investment in small and middle-market companies is highly speculative and involves a high degree of risk of credit loss. These risks are likely to increase during economic recession, such as the US and many other economies have been experiencing.

 

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We are dependent upon Apollo Investment Management’s key personnel for our future success and upon their access to Apollo’s investment professionals and partners.

We depend on the diligence, skill and network of business contacts of the senior management of AIM. Members of our senior management may depart at any time. We also depend, to a significant extent, on AIM’s access to the investment professionals and partners of Apollo and the information and deal flow generated by the Apollo investment professionals in the course of their investment and portfolio management activities. The senior management of AIM evaluates, negotiates, structures, closes and monitors our investments. Our future success depends on the continued service of the senior management team of AIM. The departure of any senior managers of AIM, or of a significant number of the investment professionals or partners of Apollo, could have a material adverse effect on our ability to achieve our investment objective. In addition, we can offer no assurance that AIM will remain our investment adviser or that we will continue to have access to Apollo’s partners and investment professionals or its information and deal flow.

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

Our ability to achieve our investment objective depends, in part, on our ability to grow, which depends, in turn, on AIM’s ability to identify, invest in and monitor companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of AIM’s structuring of the investment process, its ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms. The senior management team of AIM has substantial responsibilities under the investment advisory and management agreement, and with respect to certain members, in connection with their roles as officers of other Apollo funds.

They may also be called upon to provide managerial assistance to our portfolio companies. These demands on their time may distract them or slow the rate of investment. In order to grow, we and AIM need to hire, train, supervise and manage new employees. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

We operate in a highly competitive market for investment opportunities.

A number of entities compete with us to make the types of investments that we make. We compete with public and private funds, commercial and investment banks, commercial financing companies, and, to the extent they provide an alternative form of financing, private equity funds. Additionally, because competition for investment opportunities generally has increased in recent years among alternative investment vehicles, such as hedge funds, those entities have begun to invest in areas they have not traditionally invested in. As a result of these entrants, competition for investment opportunities intensified in recent years and may intensify further in the future. Some of our existing and potential competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions and valuation requirements that the 1940 Act imposes on us as a BDC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this existing and potentially increasing competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

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

We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss.

 

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

If we do not remain a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility.

We will be subject to corporate-level income tax if we are unable to qualify as a Regulated Investment Company (“RIC”).

To qualify as a RIC under the Code, we must meet certain source-of-income, asset diversification and annual distribution requirements. The annual distribution requirement for a RIC is satisfied if we distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to our stockholders on an annual basis. To the extent we use debt financing, we are subject to certain asset coverage ratio requirements and other financial covenants under loan and credit agreements, and could in some circumstances also become subject to such requirements under the 1940 Act, that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. If we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate-level income tax. To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments are in private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses. If we fail to qualify as a RIC for any reason and become subject to corporate-level income tax, the resulting corporate-level taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders.

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

For federal income tax purposes, we include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such original issue discount, which could be significant relative to our overall investment activities, or increases in loan balances as a result of payment-in-kind arrangements are included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we do not receive in cash.

That part of the incentive fee payable by us that relates to our net investment income is computed and paid on income that may include interest that has been accrued but not yet received in cash. If a portfolio company defaults on a loan, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible. Consequently, while we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a formal clawback right against our investment adviser per se, the amount of accrued income written off in any period will reduce the income in the period in which such write-off was taken and thereby reduce such period’s incentive fee payment.

Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the tax requirement to distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to maintain our status as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations in order to meet distribution and/or leverage requirements.

 

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

We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, the contractual arrangements governing these securities may require us to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous.

BDCs may issue and sell common stock at a price below net asset value per share only in limited circumstances, one of which is during the one-year period after stockholder approval. In August 2008, our stockholders approved a plan so that we may, in one or more public or private offerings of our common stock, sell or otherwise issue shares of our common stock at a price below the then current net asset value per share, subject to certain conditions including parameters on the level of permissible dilution, approval of the sale by a majority of our independent directors and a requirement that the sale price be not less than approximately the market price of the shares of our common stock at specified times, less the expenses of the sale. We may ask our stockholders for additional approvals from year to year. There is no assurance such approvals will be obtained.

In the event we sell, or otherwise issue, shares of our common stock at a price below net asset value per share, existing stockholders will experience net asset value dilution and the investors who acquire shares in such offering may thereafter experience the same type of dilution from subsequent offerings at a discount. For example, if we sell an additional 10% of our common shares at a 5% discount from net asset value, a stockholder who does not participate in that offering for its proportionate interest will suffer net asset value dilution of up to 0.5% or $5 per $1000 of net asset value.

We currently use borrowed funds to make investments and are exposed to the typical risks associated with leverage.

We are exposed to increased risk of loss due to our use of debt to make investments. A decrease in the value of our investments will have a greater negative impact on the value of our common stock than if we did not use debt. Our ability to pay dividends will be restricted if we fail to satisfy certain of our asset coverage ratios and other financial covenants and any amounts that we use to service our indebtedness are not available for dividends to our common stockholders.

The agreements governing our revolving credit facility require us to comply with certain financial and operational covenants. These covenants require us to, among other things, maintain certain financial ratios, including asset coverage, minimum shareholder equity and liquidity. As of March 31, 2009, we were in compliance with these covenants. However, our continued compliance with these covenants depends on many factors, some of which are beyond our control. For example, during the year ended March 31, 2009, net unrealized depreciation in our portfolio increased and, given the further deterioration in the capital markets and pricing levels subsequent to this period, net unrealized depreciation in our portfolio may continue to increase in the future. Absent an amendment to our revolving credit facility, continued unrealized depreciation in our investment portfolio could result in non-compliance with certain covenants.

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

Our current and future debt securities are and may be governed by an indenture or other instrument containing covenants restricting our operating flexibility. We, and indirectly our stockholders, bear the cost of issuing and

 

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servicing such securities. Any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock.

We fund a portion of our investments with borrowed money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.

Borrowings and other types of financing, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Our lenders have fixed dollar claims on our assets that are superior to the claims of our common stockholders or any preferred stockholders. If the value of our assets increases, then leveraging would cause the net asset value to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of consolidated interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique.

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

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

Changes in interest rates may affect our cost of capital and net investment income.

Because we borrow money, and may issue preferred stock to finance investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds or pay dividends on preferred stock and the rate at which we invest these funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, except to the extent we issue fixed rate debt or preferred stock, which could reduce our net investment income. Our long-term fixed-rate investments are financed primarily with equity and long-term debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Interest rate hedging activities do not protect against credit risk. We have analyzed the potential impact of changes in interest rates on interest income net of interest expense. Assuming that the balance sheet were to remain constant from March 31, 2009 and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% change in interest rates would not materially affect our investment income over a one-year horizon. Although management believes that this is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate.

You should also be aware that a rise in the general level of interest rates can be expected to lead to higher interest rates we receive on many of our debt investments. Accordingly, an increase in interest rates would make it easier for us to meet or exceed the performance threshold and may result in a substantial increase in the amount of incentive fees payable to our investment adviser with respect to pre-incentive fee net investment income.

 

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We may need to raise additional capital to grow because we must distribute most of our income.

We may need additional capital to fund growth in our investments. We have issued equity securities and have borrowed from financial institutions. A reduction in the availability of new capital could limit our ability to grow. We must distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to our stockholders to maintain our regulated investment company status. As a result, such earnings are not available to fund investment originations. We expect to continue to borrow from financial institutions and issue additional debt and equity securities. If we fail to obtain funds from such sources or from other sources to fund our investments, it could limit our ability to grow, which may have an adverse effect on the value of our securities. In addition, as a BDC, our ability to borrow or issue additional preferred stock may be restricted if our total assets are less than 200% of our total borrowings and preferred stock.

Many of our portfolio investments are recorded at fair value as determined in good faith by our board of directors and, as a result, there is uncertainty as to the value of our portfolio investments.

A large percentage of our portfolio investments are not publicly traded. The fair value of these investments may not be readily determinable. We value these investments quarterly at fair value (based on FAS 157, its corresponding guidance and the principal markets in which these investments trade) as determined in good faith by our board of directors pursuant to a written valuation policy and a consistently applied valuation process utilizing the input of our investment adviser, independent valuation firms and the audit committee. Our board of directors utilizes the services of independent valuation firms to aid it in determining the fair value of these investments. The types of factors that may be considered in fair value pricing of these investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to more liquid securities, indices and other market-related inputs, discounted cash flow, our principal market, and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a readily available market for these investments existed and may differ materially from the amounts we realize on any disposition of such investments. Our net asset value could be adversely affected if our determinations regarding the fair value of these investments were materially higher than the values that we ultimately realize upon the disposal of such investments.

In addition, decreases in the market values or fair values of our investments are recorded as unrealized depreciation. The continuing unprecedented declines in prices and liquidity in the debt markets have resulted in significant net unrealized depreciation in our portfolio. The effect of all of these factors on our portfolio has reduced our NAV by increasing net unrealized depreciation in our portfolio. Subsequent to December 31, 2008 and through our fiscal year end March 31, 2009, conditions in the debt and equity markets have continued to deteriorate and pricing levels have continued to decline. As a result, depending on market conditions, we could incur substantial realized losses and may continue to suffer additional unrealized losses in future periods, which could have a material adverse impact on our business, financial condition and results of operations.

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

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

 

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We may experience fluctuations in our periodic results.

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

There are significant potential conflicts of interest which could adversely affect our investment returns.

Our executive officers and directors, and the partners of our investment adviser, AIM, serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. Moreover, we note that, notwithstanding the difference in principal investment objectives between us and other Apollo funds, such other Apollo sponsored funds, including new affiliated potential pooled investment vehicles or managed accounts not yet established (whether managed or sponsored by those Apollo affiliates or AIM itself), have and may from time to time have overlapping investment objectives with us and, accordingly, invest in, whether principally or secondarily, asset classes similar to those targeted by us. To the extent such other investment vehicles have overlapping investment objectives, the scope of opportunities otherwise available to us may be adversely affected and/or reduced. As a result, the partners of AIM may face conflicts in their time management and commitments as well as in the allocation of investment opportunities to other Apollo funds. In addition, in the event such investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, AIM our desired investment portfolio may be adversely affected. Although AIM endeavors to allocate investment opportunities in a fair and equitable manner, it is possible that we may not be given the opportunity to participate in certain investments made by investment funds managed by AIM or investment managers affiliated with AIM.

There are no information barriers amongst Apollo and certain of its affiliates. If AIM were to receive material non-public information about a particular company, or have an interest in investing in a particular company, Apollo or certain of its affiliates may be prevented from investing in such company. Conversely, if Apollo or certain of its affiliates were to receive material non-public information about a particular company, or have an interest in investing in a particular company, we may be prevented in investing in such company.

AIM and/or its affiliates and investment managers may determine that an investment is appropriate both for us and for one or more other funds. In such event, depending on the availability of such investment and other appropriate factors, AIM may determine that we should invest on a side-by-side basis with one or more other funds. We may make all such investments subject to compliance with applicable regulations and interpretations, and our allocation procedures. In certain circumstances negotiated co-investments may be made only if we receive an order from the SEC permitting us to do so. There can be no assurance that any such order will be obtained.

In the course of our investing activities, we pay management and incentive fees to AIM, and reimburse AIM for certain expenses it incurs. As a result, investors in our common stock invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments. As a result of this arrangement, there may be times when the management team of AIM has interests that differ from those of our common stockholders, giving rise to a conflict.

AIM receives a quarterly incentive fee based, in part, on our pre-incentive fee income, if any, for the immediately preceding calendar quarter. This incentive fee will not be payable to the Investment Adviser unless the pre-incentive net investment income exceeds 1.75% for the quarter. To the extent we or AIM are able to exert

 

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influence over our portfolio companies, the quarterly pre-incentive fee may provide AIM with an incentive to induce our portfolio companies to prepay interest or other obligations in certain circumstances.

We have entered into a royalty-free license agreement with Apollo, pursuant to which Apollo has agreed to grant us a non-exclusive license to use the name “Apollo.” Under the license agreement, we have the right to use the “Apollo” name for so long as AIM or one of its affiliates remains our investment adviser. In addition, we rent office space from AIA, an affiliate of AIM, and pay Apollo Administration our allocable portion of overhead and other expenses incurred by AIA in performing its obligations under the administration agreement, including our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs, which can create conflicts of interest that our board of directors must monitor.

In the past following periods of volatility in the market price of a company’s securities, securities class action litigation has, from time to time, been brought against that company.

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

Changes in laws or regulations governing our operations may adversely affect our business.

We and our portfolio companies are subject to regulation by laws at the local, state and federal levels. These laws and regulations, as well as their interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations could have a material adverse affect on our business.

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

The Maryland General Corporation Law, our charter and our bylaws contain provisions that may discourage, delay or make more difficult a change in control of Apollo Investment or the removal of our directors. We are subject to the Maryland Business Combination Act, subject to any applicable requirements of the 1940 Act. Our board of directors has adopted a resolution exempting from the Business Combination Act any business combination between us and any other person, subject to prior approval of such business combination by our board of directors, including approval by a majority of our disinterested directors. If the resolution exempting business combinations is repealed or our board of directors does not approve a business combination, the Business Combination Act may discourage third parties from trying to acquire control of us and increase the difficulty of consummating such an offer. Our bylaws exempt from the Maryland Control Share Acquisition Act acquisitions of our common stock by any person. If we amend our bylaws to repeal the exemption from the Control Share Acquisition Act, the Control Share Acquisition Act also may make it more difficult for a third party to obtain control of us and increase the difficulty of consummating such an offer.

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

RISKS RELATED TO OUR INVESTMENTS

Our investments in prospective portfolio companies may be risky, and you could lose all or part of your investment.

Investment in middle-market companies involves a number of significant risks. Middle-market companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we

 

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hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment. In addition, they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. Middle-market companies are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us. Middle-market companies also generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers, directors and our investment adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies.

We invest primarily in mezzanine debt and senior secured loans and we may not realize gains from our equity investments.

When we invest in mezzanine and senior secured loans, we have and may continue to acquire warrants or other equity securities as well. In addition, we may invest directly in the equity securities of portfolio companies. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.

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

The US and most other economies have entered a recessionary period, which may be prolonged and severe. Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.

A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio company’s ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, if one of our portfolio companies were to go bankrupt, even though we or one of our affiliates may have structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to that of other creditors.

Our ability to invest in public companies may be limited in certain circumstances.

As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions) Subject to certain exceptions for follow-on investments and distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as qualifying assets only if such issuer has a market capitalization that is less than $250 million at the time of such investment.

 

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Our portfolio contains a limited number of portfolio companies, which subjects us to a greater risk of significant loss if any of these companies defaults on its obligations under any of its debt securities.

A consequence of the limited number of investments in our portfolio is that the aggregate returns we realize may be significantly adversely affected if one or more of our significant portfolio company investments perform poorly or if we need to write down the value of any one significant investment. Beyond our income tax diversification requirements, we do not have fixed guidelines for diversification, and our portfolio could contain relatively few portfolio companies.

Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.

Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in order to: (1) increase or maintain in whole or in part our equity ownership percentage; (2) exercise warrants, options or convertible securities that were acquired in the original or subsequent financing or (3) attempt to preserve or enhance the value of our investment.

We may elect not to make follow-on investments, may be constrained in our ability to employ available funds or otherwise may lack sufficient funds to make those investments. We have the discretion to make any follow-on investments, subject to the availability of capital resources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities, or because we are inhibited by compliance with BDC requirements or the desire to maintain our tax status.

When we do not hold controlling equity interests in our portfolio companies, we may not be in a position to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments.

We do not generally take controlling equity positions in our portfolio companies. To the extent that we do not hold a controlling equity interest in a portfolio company, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity for the debt and equity investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company, and may therefore suffer a decrease in the value of our investments.

An investment strategy focused primarily on privately-held companies presents certain challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns.

We have invested and will continue to invest primarily in privately-held companies. Generally, little public information exists about these companies, and we are required to rely on the ability of AIM’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies.

If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. Also, privately-held companies frequently have less diverse product lines and smaller market presence than public company competitors, which often are larger. These factors could affect our investment returns.

 

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Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.

We have invested and intend to invest primarily in mezzanine and senior debt securities issued by our portfolio companies. The portfolio companies usually have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt securities in which we invest. By their terms, such debt instruments may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the debt securities in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt securities in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. In addition, we may not be in a position to control any portfolio company by investing in its debt securities. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as debt investors.

Our incentive fee may induce AIM to make certain investments, including speculative investments.

The incentive fee payable by us to AIM may create an incentive for AIM to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to AIM is determined, which is calculated separately in two components as a percentage of the income (subject to a performance threshold) and as a percentage of the realized gain on invested capital, may encourage our investment adviser to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our common stock, including investors in offerings of common stock, securities convertible into our common stock or warrants representing rights to purchase our common stock or securities convertible into our common stock. In addition, AIM receives the incentive fee based, in part, upon net capital gains realized on our investments. Unlike the portion of the incentive fee based on income, there is no performance threshold applicable to the portion of the incentive fee based on net capital gains. As a result, AIM may have a tendency to invest more in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

The incentive fee payable by us to AIM also may create an incentive for AIM to invest on our behalf in instruments that have a deferred interest feature. Under these investments, we would accrue the interest over the life of the investment but would not receive the cash income from the investment until the end of the term. Our net investment income used to calculate the income portion of our investment fee, however, includes accrued interest. Thus, while a portion of this incentive fee would be based on income that we have not yet received in cash and with respect to which we do not have a formal clawback right against our investment adviser per se, the amount of accrued income to the extent written off in any period will reduce the income in the period in which such write-off was taken and thereby reduce such period’s incentive fee payment.

We may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to the extent we so invest, will bear our ratable share of any such investment company’s expenses, including management and performance fees. We will also remain obligated to pay management and incentive fees to AIM with respect to the assets invested in the securities and instruments of other investment companies. With respect to each of these investments, each of our common stockholders will bear his or her share of the management and incentive fee of AIM as well as indirectly bearing the management and performance fees and other expenses of any investment companies in which we invest.

 

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

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

Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.

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

Although most of our investments are denominated in U.S. dollars, our investments that are denominated in a foreign currency are subject to the risk that the value of a particular currency may change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments. We may employ hedging techniques to minimize these risks, but we can offer no assurance that we will, in fact, hedge currency risk or, that if we do, such strategies will be effective.

Hedging transactions may expose us to additional risks.

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

While we may enter into transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations.

 

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RISKS RELATED TO ISSUANCE OF OUR PREFERRED STOCK

An investment in our preferred stock should not constitute a complete investment program.

If we issue preferred stock, the net asset value and market value of our common stock may become more volatile.

We cannot assure that the issuance of preferred stock would result in a higher yield or return to the holders of the common stock. The issuance of preferred stock would likely cause the net asset value and market value of the common stock to become more volatile. If the dividend rate on the preferred stock were to approach the net rate of return on our investment portfolio, the benefit of leverage to the holders of the common stock would be reduced. If the dividend rate on the preferred stock were to exceed the net rate of return on our portfolio, the leverage would result in a lower rate of return to the holders of common stock than if we had not issued preferred stock. Any decline in the net asset value of our investments would be borne entirely by the holders of common stock. Therefore, if the market value of our portfolio were to decline, the leverage would result in a greater decrease in net asset value to the holders of common stock than if we were not leveraged through the issuance of preferred stock. This greater net asset value decrease would also tend to cause a greater decline in the market price for the common stock. We might be in danger of failing to maintain the required asset coverage of the preferred stock or of losing our ratings on the preferred stock or, in an extreme case, our current investment income might not be sufficient to meet the dividend requirements on the preferred stock. In order to counteract such an event, we might need to liquidate investments in order to fund redemption of some or all of the preferred stock. In addition, we would pay (and the holders of common stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred stock, including higher advisory fees if our total return exceeds the dividend rate on the preferred stock. Holders of preferred stock may have different interests than holders of common stock and may at times have disproportionate influence over our affairs.

Holders of any preferred stock we might issue would have the right to elect members of the board of directors and class voting rights on certain matters.

Holders of any preferred stock we might issue, voting separately as a single class, would have the right to elect two members of the board of directors at all times and in the event dividends become two full years in arrears would have the right to elect a majority of the directors until such arrearage is completely eliminated. In addition, preferred stockholders have class voting rights on certain matters, including changes in fundamental investment restrictions and conversion to open-end status, and accordingly can veto any such changes. Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of our common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies or the terms of our credit facilities, might impair our ability to maintain our qualification as a RIC for federal income tax purposes. While we would intend to redeem our preferred stock to the extent necessary to enable us to distribute our income as required to maintain our qualification as a RIC, there can be no assurance that such actions could be effected in time to meet the tax requirements.

RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK

Investing in our securities involves a high degree of risk and is highly speculative.

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

 

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

We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a business development company, we may in the future be limited in our ability to make distributions. Also, our revolving credit facility may limit our ability to declare dividends if we default under certain provisions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of the tax benefits available to us as a RIC. In addition, in accordance with U.S. generally accepted accounting principles and tax regulations, we include in income certain amounts that we have not yet received in cash, such as contractual payment-in-kind interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income in cash to obtain tax benefits as a RIC.

If we do not distribute at least 98% of our annual taxable income (excluding net long-term capital gains retained or deemed to be distributed) in the year earned, we generally will be required to pay an excise tax on amounts carried over and distributed to stockholders in the next year equal to 4% of the amount by which 98% of our annual taxable income available for distribution exceeds the distributions from such income for the current year.

Finally, if more stockholders opt to receive cash dividends rather than participate in our dividend reinvestment plan, we may be forced to liquidate some of our investments and raise cash in order to make cash dividend payments.

Our shares may trade at discounts from net asset value or at premiums that are unsustainable over the long term.

Shares of business development companies may trade at a market price that is less than the net asset value that is attributable to those shares. The possibility that our shares of common stock will trade at a discount from net asset value or at a premium that is unsustainable over the long term are separate and distinct from the risk that our net asset value will decrease. It is not possible to predict whether shares will trade at, above, or below net asset value.

The market price of our securities may fluctuate significantly.

The market price and liquidity of the market for our securities may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:

 

   

volatility in the market price and trading volume of securities of business development companies or other companies in our sector, which are not necessarily related to the operating performance of these companies;

 

   

changes in regulatory policies or tax guidelines, particularly with respect to RICs or business development companies;

 

   

loss of RIC status;

 

   

changes in earnings or variations in operating results;

 

   

changes in the value of our portfolio of investments;

 

   

any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;

 

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departure of AIM’s key personnel;

 

   

operating performance of companies comparable to us;

 

   

general economic trends and other external factors; and

 

   

loss of a major funding source.

We may be unable to invest the net proceeds raised from offerings on acceptable terms, which would harm our financial condition and operating results.

Until we identify new investment opportunities, we intend to either invest the net proceeds of future offerings in interest-bearing deposits or other short-term instruments or use the net proceeds from such offerings to reduce then-outstanding obligations under our credit facility. We cannot assure you that we will be able to find enough appropriate investments that meet our investment criteria or that any investment we complete using the proceeds from an offering will produce a sufficient return.

Sales of substantial amounts of our securities may have an adverse effect on the market price of our securities.

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

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

All dividends declared in cash payable to stockholders that are participants in our dividend reinvestment plan are generally automatically reinvested in shares of our common stock. As a result, stockholders that do not participate in the dividend reinvestment plan may experience dilution over time. Stockholders who do not elect to receive dividends in shares of common stock may experience accretion to the net asset value of their shares if our shares are trading at a premium and dilution if our shares are trading at a discount. The level of accretion or discount would depend on various factors, including the proportion of our stockholders who participate in the plan, the level of premium or discount at which our shares are trading and the amount of the dividend payable to a stockholder.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

As of March 31, 2009, we do not own any real estate or other physical properties materially important to our operation. Our administrative and principal executive offices are located at 730 Fifth Avenue, New York, NY 10019 and 9 West 57th Street, New York, NY 10019, respectively. We believe that our office facilities are suitable and adequate for our business as it is contemplated to be conducted.

Item 3. Legal Proceedings

As of March 31, 2009, we were not subject to any material pending legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during our fourth fiscal quarter ended March 31, 2009.

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

PRICE RANGE OF COMMON STOCK

Our common stock is traded on the NASDAQ Global Select Market under the symbol “AINV.” The following table lists the high and low closing sale price for our common stock, the closing sale price as a percentage of net asset value, or NAV and quarterly dividends per share since shares of our common stock began being regularly quoted on NASDAQ.

 

     NAV(1)    Closing Sales Price    Premium or
Discount of
High Sales
Price to
NAV(2)
    Premium or
Discount of
Low Sales
Price to
NAV(2)
    Declared
Dividends
              
        High    Low       

Fiscal Year Ending March 31, 2009

               

Fourth Fiscal Quarter

   $ 9.82    $ 9.76    $ 2.05    99 %   21 %   $ 0.260

Third Fiscal Quarter

   $ 9.87    $ 15.85    $ 6.08    161 %   62 %   $ 0.520

Second Fiscal Quarter

   $ 13.73    $ 17.99    $ 13.11    131 %   95 %   $ 0.520

First Fiscal Quarter

   $ 15.93    $ 18.59    $ 14.33    117 %   90 %   $ 0.520

Fiscal Year Ending March 31, 2008

               

Fourth Fiscal Quarter

   $ 15.83    $ 16.70    $ 14.21    105 %   90 %   $ 0.520

Third Fiscal Quarter

   $ 17.71    $ 21.81    $ 16.32    123 %   92 %   $ 0.520

Second Fiscal Quarter

   $ 18.44    $ 22.90    $ 19.50    124 %   106 %   $ 0.520

First Fiscal Quarter

   $ 19.09    $ 24.13    $ 21.37    126 %   112 %   $ 0.510

 

(1) NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices. The NAVs shown are based on outstanding shares at the end of each period.
(2) Calculated as of the respective high or low closing sales price divided by the quarter end NAV.

While our common stock has from time to time traded in excess of our net asset value, there can be no assurance, however, that it will trade at such a premium (to net asset value) in the future. The last reported closing market price of our common stock on May 15, 2009 was $5.78 per share. As of May 15, 2009, we had 108 stockholders of record.

DIVIDENDS

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

We have elected to be taxed as a RIC under Subchapter M of the Internal Revenue Code of 1986. To maintain our RIC status, we must distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.

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

 

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We may not be able to achieve operating results that will allow us to make dividends and distributions at a specific level or to increase the amount of these dividends and distributions from time to time. In addition, we may be limited in our ability to make dividends and distributions due to the asset coverage test for borrowings when applicable to us as a business development company under the 1940 Act and due to provisions in current and future credit facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our RIC status. We cannot assure stockholders that they will receive any dividends and distributions or dividends and distributions at a particular level.

All dividends declared in cash payable to stockholders that are participants in our dividend reinvestment plan are generally automatically reinvested in shares of our common stock. As a result, stockholders that do not participate in the dividend reinvestment plan may experience dilution over time. Stockholders who do not elect to receive dividends in shares of common stock may experience accretion to the net asset value of their shares if our shares are trading at a premium and dilution if our shares are trading at a discount. The level of accretion or discount would depend on various factors, including the proportion of our stockholders who participate in the plan, the level of premium or discount at which our shares are trading and the amount of the dividend payable to a stockholder.

The following table lists the quarterly dividends per share from our common stock for the past two fiscal years.

 

     Declared Dividends

Fiscal Year Ending March 31, 2009

  

Fourth Fiscal Quarter

   $ 0.26

Third Fiscal Quarter

   $ 0.52

Second Fiscal Quarter

   $ 0.52

First Fiscal Quarter

   $ 0.52

Fiscal Year Ending March 31, 2008

  

Fourth Fiscal Quarter

   $ 0.52

Third Fiscal Quarter

   $ 0.52

Second Fiscal Quarter

   $ 0.52

First Fiscal Quarter

   $ 0.51

Recent Sale of Unregistered Securities

We did not engage in any sales of unregistered securities during the fiscal year ended March 31, 2009.

 

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STOCK PERFORMANCE GRAPH

This graph compares the return on our common stock with that of the Standard & Poor’s 500 Stock Index and the Russell 2000 Financial Services Index, for the period April 8, 2004 (inception of Apollo Investment Corporation) through March 31, 2009. The graph assumes that, on April 8, 2004, a person invested $100 in each of our common stock, the S&P 500 Index, and the Russell 2000 Financial Services Index. The graph measures total stockholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are invested in like securities.

LOGO

The graph and other information furnished under this Part II Item 5 of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the 1934 Act. The stock price performance included in the above graph is not necessarily indicative of future stock price performance.

 

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Item 6. Selected Financial Data

The Statement of Operations, Per Share and Balance Sheet data for the fiscal years ended March 31, 2009, 2008, 2007, 2006 and the period ended March 31, 2005 are derived from our financial statements which have been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm. This selected financial data should be read in conjunction with our financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.

 

     For the Year Ended March 31,
(dollar amounts in thousands,
except per share data)
    For the Period
April 8, 2004* through
March 31, 2005
 

Statement of Operations Data:

   2009     2008     2007     2006    

Total Investment Income

   $ 377,304     $ 357,878     $ 266,101     $ 152,827     $ 47,833  

Net Expenses (including taxes)

   $ 170,973     $ 156,272     $ 140,783     $ 63,684     $ 22,380  

Net Investment Income

   $ 206,331     $ 201,606     $ 125,318     $ 89,143     $ 25,453  

Net Realized and Unrealized Gains (Losses)

   $ (818,210 )   $ (235,044 )   $ 186,848     $ 31,244     $ 18,692  

Net Increase (Decrease) in Net Assets Resulting from Operations

   $ (611,879 )   $ (33,438 )   $ 312,166     $ 120,387     $ 44,145  

Per Share Data:

          

Net Asset Value

   $ 9.82     $ 15.83     $ 17.87     $ 15.15     $ 14.27  

Net Increase (Decrease) in Net Assets Resulting from Operations

   $ (4.39 )   $ (0.30 )   $ 3.64     $ 1.90     $ 0.71  

Distributions Declared

   $ 1.820     $ 2.070     $ 1.930     $ 1.630     $ 0.485  

Balance Sheet Data:

          

Total Assets

   $ 2,548,639     $ 3,724,324     $ 3,523,218     $ 2,511,074     $ 1,733,384  

Borrowings Outstanding

   $ 1,057,601     $ 1,639,122     $ 492,312     $ 323,852     $ 0  

Total Net Assets

   $ 1,396,138     $ 1,897,908     $ 1,849,748     $ 1,229,855     $ 892,886  

Other Data:

          

Total Return(1)

     (73.9 )%     (17.5 )%     31.7 %     12.9 %     15.3 %

Number of Portfolio Companies at Period End

     72       71       57       46       35  

Total Portfolio Investments for the Period

   $ 434,995     $ 1,755,913     $ 1,446,730     $ 1,110,371     $ 894,335  

Investment Sales and Prepayments for the Period

   $ 339,724     $ 714,225     $ 845,485     $ 452,325     $ 71,730  

Weighted Average Yield on Debt Portfolio at Period End

     11.7 %     12.0 %     13.1 %     13.1 %     10.5 %

 

 * Commencement of operations
(1) Total return is based on the change in market price per share and takes into account dividends and distributions, if any, reinvested in accordance with Apollo Investment’s dividend reinvestment plan. Total return is not annualized.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this report.

Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein 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; and

 

   

the timing of cash flows, if any, from the operations of our portfolio companies.

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

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 any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

OVERVIEW

Apollo Investment was incorporated under the Maryland General Corporation Law in February 2004. We have elected to be treated as a BDC under the 1940 Act. As such, 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 or thinly traded public U.S. companies, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, for federal income tax purposes we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended. Pursuant to this election and assuming we qualify as a RIC, we generally do not have to pay corporate-level federal income taxes on any income we distribute to our stockholders. Apollo Investment commenced operations on April 8, 2004 upon completion of its initial public offering that raised $870 million in net proceeds selling 62 million shares of its common stock at a price of $15.00 per share. Since then, and through March 31, 2009, we have raised approximately $1.4 billion in net proceeds from additional offerings of common stock.

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive

 

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environment for the types of investments we make. As a business development company, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Pursuant to rules adopted in 2006, the SEC expanded the definition of “eligible portfolio company” to include certain public companies that do not have any securities listed on a national securities exchange. The SEC recently adopted an additional new rule under the 1940 Act to expand the definition of “eligible portfolio company” to include companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million. This new rule became effective July 21, 2008.

Revenue

We generate revenue primarily in the form of interest and dividend income from the debt and preferred securities we hold and capital gains, if any, on investment securities that we may acquire in portfolio companies. Our debt investments, whether in the form of mezzanine or senior secured loans, generally have a stated term of five to ten years and bear interest at a fixed rate or a floating rate usually determined on the basis of a benchmark: LIBOR, EURIBOR, GBP LIBOR, or the prime rate. While U.S. subordinated debt and corporate notes typically accrue interest at fixed rates, some of these investments may include zero coupon, payment-in-kind (“PIK”) and/or step-up bonds that accrue income on a constant yield to call or maturity basis. Interest on debt securities is generally payable quarterly or semiannually. In some cases, some of our investments provide for deferred interest payments or PIK. The principal amount of the debt securities and any accrued but unpaid interest generally becomes due at the maturity date. In addition, we may generate revenue in the form of dividends paid to us on common equity investments as well as revenue in the form of commitment, origination, structuring fees, fees for providing managerial assistance and, if applicable, consulting fees, etc.

Expenses

All investment professionals of the investment adviser and their staff, when and to the extent engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses of that personnel which is allocable to those services are provided and paid for by AIM. We bear all other costs and expenses of our operations and transactions, including those relating to:

 

   

investment advisory and management fees;

 

   

expenses incurred by AIM payable to third parties, including agents, consultants or other advisors, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies;

 

   

calculation of our net asset value (including the cost and expenses of any independent valuation firm);

 

   

direct costs and expenses of administration, including independent registered public accounting and legal costs;

 

   

costs of preparing and filing reports or other documents with the SEC;

 

   

interest payable on debt, if any, incurred to finance our investments;

 

   

offerings of our common stock and other securities;

 

   

registration and listing fees;

 

   

fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments;

 

   

transfer agent and custodial fees;

 

   

taxes;

 

   

independent directors’ fees and expenses;

 

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marketing and distribution-related expenses;

 

   

the costs of any reports, proxy statements or other notices to stockholders, including printing and postage costs;

 

   

our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

   

organization and offering; and

 

   

all other expenses incurred by us or the Administrator in connection with administering our business, such as our allocable portion of overhead under the administration agreement, including rent and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs.

We expect our general and administrative operating expenses related to our ongoing operations to increase moderately in dollar terms. During periods of asset growth, we expect our general and administrative operating expenses to decline as a percentage of our total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities, among others, may also increase or reduce overall operating expenses based on portfolio performance, benchmarks LIBOR and EURIBOR, and offerings of our securities relative to comparative periods, among other factors.

Portfolio and Investment Activity

During our fiscal year ended March 31, 2009, we invested $435 million across 12 new and 13 existing portfolio companies. This compares to investing $1.8 billion in 27 new and 15 existing portfolio companies for the previous fiscal year ended March 31, 2008. Investments sold or prepaid during the fiscal year ended March 31, 2009 totaled $340 million versus $714 million for the fiscal year ended March 31, 2008.

At March 31, 2009, our net portfolio consisted of 72 portfolio companies and was invested 27% in senior secured loans, 59% in subordinated debt, 4% in preferred equity and 10% in common equity and warrants measured at fair value versus 71 portfolio companies invested 22% in senior secured loans, 57% in subordinated debt, 6% in preferred equity and 15% in common equity and warrants at March 31, 2008.

The weighted average yields on our senior secured loan portfolio, subordinated debt portfolio and total debt portfolio at our current cost basis were 8.2%, 13.2% and 11.7%, respectively, at March 31, 2009. At March 31, 2008, the yields were 10.0%, 12.8%, and 12.0%, respectively.

Since the initial public offering of Apollo Investment Corporation in April 2004 and through March 31, 2009, invested capital totals $5.6 billion in 124 portfolio companies. Over the same period, Apollo Investment has also completed transactions with more than 85 different financial sponsors.

Senior secured loans and European mezzanine loans typically accrue interest at variable rates determined on the basis of a benchmark: LIBOR, EURIBOR, GBP LIBOR, or the prime rate, with stated maturities at origination that typically range from 5 to 10 years. While subordinated debt issued within the United States will typically accrue interest at fixed rates, some of these investments may include zero-coupon, PIK and/or step bonds that accrue income on a constant yield to call or maturity basis. At March 31, 2009, 69% or $1.5 billion of our interest-bearing investment portfolio is fixed rate debt and 31% or $0.7 billion is floating rate debt, measured at fair value. At March 31, 2008, 62% or $1.6 billion of our interest-bearing investment portfolio was fixed rate debt and 38% or $1.0 billion was floating rate debt.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires management to make

 

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estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ materially. In addition to the discussion below, our critical accounting policies are further described in the notes to the financial statements.

Valuation of Portfolio Investments

Under procedures established by our Board of Directors, we value investments, including certain subordinated debt, senior secured debt and other debt securities with maturities greater than 60 days, for which market quotations are readily available, at such market quotations (unless they are deemed not to represent fair value). We typically obtain market quotations from at least two brokers or dealers (if available, otherwise from a principal market maker or a primary market dealer or other independent pricing service). We utilize mid-market pricing as a practical expedient for fair value unless a different point within the range is more representative. If and when market quotations are deemed not to represent fair value, we typically utilize independent third party valuation firms to assist us in determining fair value. Given the general market dislocation, the lack of trading activity and the forced sellers we noted in the market during the fiscal year ended March 31, 2009, our research and diligence concluded that the limited but available market quotations on a number of performing or outperforming credits may not be representative of fair value under generally accepted accounting principles in the U.S. Accordingly, such investments went through our multi-step valuation process as described below. In each case, our independent valuation firms considered observable market inputs together with significant unobservable inputs in arriving at their valuation recommendations for such Level 3 categorized assets. Investments maturing in 60 days or less are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. Debt and equity securities that are not publicly traded or whose market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of our Board of Directors. Such determination of fair values may involve subjective judgments and estimates.

With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our board of directors has approved a multi-step valuation process each quarter, as described below:

(1) our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our investment adviser responsible for the portfolio investment;

(2) preliminary valuation conclusions are then documented and discussed with senior management of our investment adviser;

(3) independent valuation firms engaged by our board of directors conduct independent appraisals and review our investment adviser’s preliminary valuations and make their own independent assessment;

(4) the audit committee of the board of directors reviews the preliminary valuation of our investment adviser and that of the independent valuation firm and responds to the valuation recommendation of the independent valuation firm to reflect any comments; and

(5) 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, the respective independent valuation firm and the audit committee.

Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading

 

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and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, our principal market (as the reporting entity) and enterprise values, among other factors.

In September, 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. We adopted this statement for our first fiscal quarter ended June 30, 2008.

SFAS No. 157 classifies the inputs used to measure these fair values into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable inputs for the asset or liability.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment.

On October 10, 2008, FASB Staff Position 157-3—Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (“FAS 157-3”) was issued. FAS 157-3 provides examples of how to determine fair value in a market that is not active. FAS 157-3 did not change the fair value measurement principles set forth in FAS 157. Furthermore, on April 9, 2009, FASB Staff Position 157-4—Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FAS 157-4”) was issued. FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. According to FAS 157-4, in the above circumstances, more analysis and significant adjustments to transactions or quoted prices may be necessary to estimate fair value. FAS 157-4 is effective for periods ending after June 15, 2009. We are currently reviewing FAS 157-4 and the future impact, if any, it will have on our financial position or results of operations.

Revenue Recognition

We record interest and dividend income on an accrual basis to the extent that we expect to collect such amounts. For loans and securities with contractual PIK interest or dividends, which represents contractual interest or dividends accrued and added to the balance that generally becomes due at maturity; we may not accrue PIK income if the portfolio company valuation indicates that the PIK income is not collectible, among other factors. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to collect such income. Loan origination fees, original issue discount, and market discount are capitalized and we amortize such amounts as interest income. Upon the prepayment of a loan or security, any unamortized loan origination fees are recorded as interest income. We record prepayment premiums on loans and securities as interest income when we receive such amounts.

 

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Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

RESULTS OF OPERATIONS

Results comparisons are for the fiscal years ended March 31, 2009, March 31, 2008 and March 31, 2007.

Investment Income

For the fiscal years ended March 31, 2009, March 31, 2008 and March 31, 2007, gross investment income totaled $377.3 million, $357.9 million and $266.1 million, respectively. The increase in gross investment income from fiscal year 2008 to fiscal year 2009 was primarily due to changes in the composition of the portfolio as compared to the previous fiscal year. The increase in gross investment income from fiscal year 2007 to fiscal year 2008 was primarily due to the growth of our investment portfolio as compared to the previous fiscal year. Origination, closing and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans.

Expenses

Net operating expenses totaled $170.5 million, $154.4 million and $139.7 million, respectively, for the fiscal years ended March 31, 2009, March 31, 2008 and March 31, 2007, of which $111.3 million, $90.3 million and $98.5 million, respectively, were base management fees and performance-based incentive fees and $48.9 million, $55.8 million and $34.4 million, respectively, were interest and other credit facility expenses. Of these net operating expenses, general and administrative expenses totaled $10.3 million, $8.3 million and $6.8 million, respectively, for the fiscal years ended March 31, 2009, 2008 and 2007. Net expenses consist of base investment advisory and management fees, insurance expenses, administrative services fees, legal fees, directors’ fees, audit and tax services expenses, and other general and administrative expenses. The increase in net expenses from fiscal 2008 to 2009 was primarily related to the increase in performance-based incentive expenses accrued during fiscal 2009 as compared to those accrued during fiscal 2008. Accrued performance-based incentive expenses for the fiscal year ended March 31, 2008 reflect an accrual reduction of $16.0 million attributable to the difference between the amount of net realized capital gains based incentive fees accrued at March 31, 2007 and what was ultimately earned and paid in December 31, 2007. The increase in net expenses from fiscal 2007 to 2008 were primarily related to increases in base management fees, performance-based incentive fees and other general and administrative expenses related to the growth of our investment portfolio as compared to the previous period. In addition, excise tax expense totaled $0.5 million, $1.9 million, and $1.1 million for the fiscal years ended March 31, 2009, 2008 and 2007.

Net Investment Income

The Company’s net investment income totaled $206.3 million, $201.6 million and $125.3 million, or $1.48, $1.82, and $1.49, on a per share basis, respectively, for the fiscal years ended March 31, 2009, 2008 and 2007.

Net Realized Gains

The Company had investment sales and prepayments totaling $340 million, $714 million and $845 million, respectively, for the fiscal years ended March 31, 2009, 2008 and 2007. Net realized losses for the fiscal year ended March 31, 2009 were $83.7 million. Net realized gains for the fiscal years ended March 31, 2008 and 2007 were $54.3 million and $132.9 million, respectively.

 

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Net Unrealized Appreciation (Depreciation) on Investments, Cash Equivalents and Foreign Currencies

For the fiscal years ended March 31, 2009 and 2008, net change in unrealized depreciation on the Company’s investments, cash equivalents, foreign currencies and other assets and liabilities totaled $734.5 million and $289.3 million, respectively. For the fiscal year ended March 31, 2007, net change in unrealized appreciation on the Company’s investments, cash equivalents, foreign currencies and other assets and liabilities totaled $54.0 million. A material increase in unrealized depreciation was recognized for the most recent fiscal year from significantly lower fair value determinations on many of our investments. Lower fair values were driven primarily from the general market dislocation, the illiquid capital markets, and the current market expectations for pricing increased credit risk and default assumptions.

Net Increase (Decrease) in Net Assets From Operations

For the fiscal years ended March 31, 2009 and 2008, the Company had a net decrease in net assets resulting from operations of $611.9 million and $33.4 million, respectively. For the fiscal year ended March 31, 2007, the Company had a net increase in net assets resulting from operations of $312.2 million. The loss per share was $4.39 and $0.30 for the years ended March 31, 2009 and 2008, respectively. For the year ended March 31, 2007, earnings per share were $3.64.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s liquidity and capital resources are generated and generally available through periodic follow-on equity offerings, through its senior secured, multi-currency $1.7 billion, five-year, revolving credit facility maturing in April 2011, through investments in special purpose entities in which we hold and finance particular investments on a non-recourse basis, as well as from cash flows from operations, investment sales of liquid assets and prepayments of senior and subordinated loans and income earned from investments and cash equivalents. At March 31, 2009, the Company had $1.06 billion in borrowings outstanding and $0.64 billion of unused capacity. Given our asset coverage requirements, use of the capital resources available to us has been significantly curtailed due to the effect of unrealized depreciation on our leverage ratio. In addition, we currently expect any present liquidity needs to be met from continued cash flows from operations and investment sales and prepayments, among other actions. In the future, the Company may raise additional equity or debt capital off its shelf registration, among other considerations. The primary use of funds will be investments in portfolio companies, cash distributions to our stockholders, reductions in debt outstanding and other general corporate purposes. On May 16, 2008, the Company closed on its most recent follow-on public equity offering of 22.3 million shares of common stock at $17.11 per share raising approximately $369.6 million in net proceeds.

 

     Payments due by Period (dollars in millions)
     Total    Less than
1 year
   1-3 years    3-5 years    More than
5 years

Senior Secured Revolving Credit Facility(1)

   $ 1,058    $ —      $ 1,058    $ —      $ —  

 

(1) At March 31, 2009, $642 million remained unused under our senior secured revolving credit facility. Pricing of our credit facility is 100 basis points over LIBOR.

 

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Information about our senior securities is shown in the following table as of each year ended March 31 since the Company commenced operations, unless otherwise noted. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.

 

Class and Year

   Total Amount
Outstanding
(dollars in
thousands)(1)
   Asset
Coverage
Per Unit(2)
   Involuntary
Liquidating
Preference
Per Unit(3)
   Average
Market Value
Per Unit(4)

Revolving Credit Facility

           

Fiscal 2009

   $ 1,057,601    $ 2,320    $ —      N/A

Fiscal 2008

     1,639,122      2,158      —      N/A

Fiscal 2007

     492,312      4,757      —      N/A

Fiscal 2006

     323,852      4,798      —      N/A

Fiscal 2005

     0      0      —      N/A

 

(1) Total amount of each class of senior securities outstanding at the end of the period presented.
(2) The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by $1 to determine the Asset Coverage Per Unit.
(3) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.
(4) Not applicable, as senior securities are not registered for public trading.

Contractual Obligations

We have entered into two contracts under which we have future commitments: the investment advisory and management agreement, pursuant to which AIM has agreed to serve as our investment adviser, and the administration agreement, pursuant to which the Administrator has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance. Payments under the investment advisory and management agreement are equal to (1) a percentage of the value of our average gross assets and (2) a two-part incentive fee. Payments under the administration agreement are equal to an amount based upon our allocable portion of the Administrator’s overhead in performing its obligations under the administration agreement, including rent, technology systems, insurance and our allocable portion of the costs of our chief financial officer and chief compliance officer and their respective staffs. Either party may terminate each of the investment advisory and management agreement and administration agreement without penalty upon not more than 60 days’ written notice to the other. Please see Note 3 within our financial statements for more information.

Off-Balance Sheet Arrangements (dollars in thousands)

The Company has the ability to issue standby letters of credit through its revolving credit facility. As of March 31, 2009 and March 31, 2008, the Company had issued through JPMorgan Chase Bank, N.A. standby letters of credit totaling $3,508 and $14,435, respectively.

AIC Credit Opportunities Fund LLC (currencies in thousands)

We own all of the common member interests in AIC Credit Opportunity Fund LLC (“AIC Holdco”), which was formed for the purpose of holding various financed investments. Effective in June 2008, we invested $39,500 in a special purpose entity wholly owned by AIC Holdco, AIC (FDC) Holdings LLC (“Apollo FDC”), which was used to purchase a Junior Profit-Participating Note due 2013 in principal amount of $39,500 (the “Junior Note”) from Apollo I Trust (the “Trust”). The Trust also issued a Senior Floating Rate Note due 2013 (the “Senior Note”) to an unaffiliated third party (“FDC Counterparty”) in principal amount of $39,500 paying interest at

 

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Libor plus 1.50%, increasing over time to Libor plus 2.0%. The Trust used the aggregate $79,000 proceeds to acquire $100,000 face value of a senior subordinated loan of First Data Corporation (the “FDC Reference Obligation”) due 2016 and paying interest at 11.25% per year. The Junior Note generally entitles Apollo FDC to the net interest and other proceeds due under the FDC Reference Obligation after payment of interest due under the Senior Notes, as described above. In addition, Apollo FDC is entitled to 100% of any realized appreciation in the FDC Reference Obligation and, since the Senior Note is a non-recourse obligation, is exposed up to the amount of equity used by AIC Holdco to fund the purchase of the Junior Note plus any additional margin Apollo decides to post, if any, during the term of the financing.

Through AIC Holdco, effective in June 2008, we invested $11,375 in a special purpose entity wholly owned by AIC Holdco, AIC (TXU) Holdings LLC (“Apollo TXU”), which acquired exposure to $50,000 notional amount of a Libor plus 3.5% senior secured delayed draw term loan of Texas Competitive Electric Holdings (“TXU”) due 2014 through a non-recourse total return swap with an unaffiliated third party expiring on October 10, 2013 and pursuant to which Apollo TXU pays interest at Libor plus 1.5% and generally receives all proceeds due under the delayed draw term loan of TXU (the “TXU Reference Obligation”). Like Apollo FDC, Apollo TXU is entitled to 100% of any realized appreciation in the TXU Reference Obligation and, since the total return swap is a non-recourse obligation, is exposed up to the amount of equity used by AIC Holdco to fund the investment in the total return swap, plus any additional margin we decide to post, if any, during the term of the financing.

Through AIC Holdco, effective in September 2008, we invested $10,022 equivalent, in a special purpose entity wholly owned by AIC Holdco, AIC (Boots) Holdings, LLC (“Apollo Boots”), which acquired €23,383 and £12,465 principal amount of senior term loans of AB Acquisitions Topco 2 Limited, a holding company for the Alliance Boots group of companies (the “Boots Reference Obligations”), out of the proceeds of our investment and a multicurrency $40,876 equivalent non-recourse loan to Apollo Boots (the “Acquisition Loan”) by an unaffiliated third party that matures in September 2013 and pays interest at LIBOR plus 1.25% or, in certain cases, the higher of the Federal Funds Rate plus 0.50% or the lender’s prime-rate. The Boots Reference Obligations pay interest at the rate of LIBOR plus 3% per year and mature in June 2015.

Pursuant to applicable investment company accounting, we do not consolidate AIC Holdco or its wholly owned subsidiaries and accordingly only the value of our investment in AIC Holdco is included on our balance sheet. The Senior Note, total return swap and Acquisition Loan are non-recourse to AIC Holdco, its subsidiaries and us and have standard events of default including failure to pay contractual amounts when due and failure by each of the underlying Apollo special purpose entities to provide additional credit support, sell assets or prepay a portion of its obligations if the value of the FDC Reference Obligation, the TXU Reference Obligation or the Boots Reference Obligation, as applicable, declines below specified levels. We may unwind any of these transactions at any time without penalty. From time to time Apollo Investment may provide additional capital to AIC Holdco for purposes of funding margin calls under one or more of the transactions described above. During the fiscal year ended March 31, 2009, we provided $18,480 in additional capital to AIC Holdco.

Dividends

Dividends paid to stockholders for the fiscal years ended March 31, 2009, 2008 and 2007 totaled $258.8 million or $1.82 per share, $230.9 million or $2.07 per share, and $168.4 million or $1.93 per share, respectively. Tax characteristics of all dividends will be reported to shareholders on Form 1099 after the end of the calendar year. Our quarterly dividends, if any, will be determined by our Board of Directors.

 

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The following table summarizes our quarterly dividends paid to stockholders for the fiscal years ended March 31, 2009, 2008 and 2007, respectively:

 

     Declared Dividends

Fiscal Year Ending March 31, 2009

  

Fourth Fiscal Quarter

   $ 0.26

Third Fiscal Quarter

   $ 0.52

Second Fiscal Quarter

   $ 0.52

First Fiscal Quarter

   $ 0.52

Fiscal Year Ending March 31, 2008

  

Fourth Fiscal Quarter

   $ 0.52

Third Fiscal Quarter

   $ 0.52

Second Fiscal Quarter

   $ 0.52

First Fiscal Quarter

   $ 0.51

Fiscal Year Ending March 31, 2007

  

Fourth Fiscal Quarter

   $ 0.51

Third Fiscal Quarter

   $ 0.50

Second Fiscal Quarter

   $ 0.47

First Fiscal Quarter

   $ 0.45

We have elected to be taxed as a RIC under Subchapter M of the Internal Revenue Code of 1986. To maintain our RIC status, we must distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.

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

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a business development company, we may in the future be limited in our ability to make distributions. Also, our revolving credit facility may limit our ability to declare dividends if we default under certain provisions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of the tax benefits available to us as a regulated investment company. In addition, in accordance with U.S. generally accepted accounting principles and tax regulations, we include in income certain amounts that we have not yet received in cash, such as contractual payment-in-kind interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a regulated investment company.

With respect to the dividends paid to stockholders, income from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies is treated as taxable income and accordingly, distributed to stockholders. For the fiscal years ended March 31, 2009, 2008 and 2007 upfront fees totaling $0.4 million, $0.1 million and $8.3 million, respectively, are being amortized into income over the lives of their respective loans to the extent such loans remain outstanding.

 

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Item 7A. Quantitative and Qualitative Disclosure about Market Risk

We are subject to financial market risks, including changes in interest rates. During the fiscal year ended March 31, 2009, many of the loans in our portfolio had floating interest rates. These loans are usually based on floating LIBOR and typically have durations of one to six months after which they reset to current market interest rates. As the percentage of our U.S. mezzanine and other subordinated loans increase as a percentage of our total investments, we expect that more of the loans in our portfolio will have fixed rates. At March 31, 2009, our floating-rate assets and floating-rate liabilities were closely matched. As such, a change in interest rates would not have a material effect on our net investment income. However, we may hedge against interest rate fluctuations from time-to-time by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. During the fiscal year ended March 31, 2009, we did not engage in interest rate hedging activities.

 

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Item 8. Financial Statements and Supplementary Data

 

Index to Financial Statements

    

Management’s Report on Internal Control over Financial Reporting

   40

Report of Independent Registered Public Accounting Firm

   41

Statement of Assets & Liabilities as of March 31, 2009 and March 31, 2008

   42

Statement of Operations for the years ended March 31, 2009, March 31, 2008 and March 31, 2007

   43

Statement of Changes in Net Assets for the years ended March 31, 2009, March 31, 2008 and March  31, 2007

   44

Statement of Cash Flows for the years ended March 31, 2009, March 31, 2008 and March 31, 2007

   45

Schedule of Investments as of March 31, 2009 and March 31, 2008

   46

Notes to Financial Statements

   60

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of March 31, 2009. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2009 based upon criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that the Company’s internal control over financial reporting was effective as of March 31, 2009 based on the criteria on Internal Control — Integrated Framework issued by COSO.

The effectiveness of the Company’s internal control over financial reporting as of March 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Apollo Investment Corporation:

In our opinion, the accompanying statements of assets and liabilities including the schedules of investments, and the related statements of operations, changes in net assets, cash flows, and financial highlights present fairly, in all material respects, the financial position of Apollo Investment Corporation (“the Company”) at March 31, 2009 and March 31, 2008, and the results of its operations, the changes in net assets, and its cash flows for each of the three years in the period ended March 31, 2009, and the financial highlights for each of the periods presented in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing on page 37 of the annual report to shareholders. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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

/s/  PricewaterhouseCoopers LLP

New York, New York

May 29, 2009

 

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APOLLO INVESTMENT CORPORATION

STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except per share amounts)

 

     March 31, 2009     March 31, 2008  

Assets

    

Non-controlled/non-affiliated investments, at value (cost—$3,056,709 and $3,139,047, respectively)

   $ 2,319,815     $ 2,986,556  

Controlled investments, at value (cost—$326,777 and $247,400, respectively)

     126,083       246,992  

Cash equivalents, at value (cost—$0 and $404,063, respectively)

     —         403,898  

Cash

     5,914       8,954  

Foreign currency (cost—$694 and $2,140, respectively)

     693       2,130  

Interest receivable

     42,461       46,643  

Dividends receivable

     48,295       23,024  

Miscellaneous income receivable

     51       —    

Receivable from investment adviser

     393       231  

Prepaid expenses and other assets

     4,934       5,896  
                

Total assets

   $ 2,548,639     $ 3,724,324  
                

Liabilities

    

Credit facility payable (see note 7 & 12)

   $ 1,057,601     $ 1,639,122  

Dividends payable

     36,978       9,368  

Payable for investments purchased

     27,555       142,339  

Management and performance-based incentive fees payable (see note 3)

     25,314       26,969  

Interest payable

     711       6,178  

Accrued administrative expenses

     1,547       288  

Other liabilities and accrued expenses

     2,795       2,152  
                

Total liabilities

   $ 1,152,501     $ 1,826,416  
                

Net Assets

    

Common stock, par value $.001 per share, 400,000 and 400,000 common shares authorized, respectively, and 142,221 and 119,894 issued and outstanding, respectively

   $ 142     $ 120  

Paid-in capital in excess of par (see note 2f)

     2,352,205       1,983,795  

Undistributed net investment income (see note 2f)

     96,174       24,959  

Accumulated net realized gain (loss) (see note 2f)

     (120,811 )     86,136  

Net unrealized depreciation

     (931,572 )     (197,102 )
                

Total Net Assets

   $ 1,396,138     $ 1,897,908  
                

Total liabilities and net assets

   $ 2,548,639     $ 3,724,324  
                

Net Asset Value Per Share

   $ 9.82     $ 15.83  
                

See notes to financial statements.

 

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APOLLO INVESTMENT CORPORATION

STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

     Year Ended March 31,  
     2009     2008     2007  

INVESTMENT INCOME:

      

From non-controlled/non-affiliated investments:

      

Interest

   $ 340,664     $ 321,684     $ 245,348  

Dividends

     11,940       14,551       18,021  

Other Income

     5,326       4,643       2,732  

From controlled investments:

      

Dividends

     19,374       7,000       —    

Other Income

     —         10,000       —    
                        

Total Investment Income

     377,304       357,878       266,101  
                        

EXPENSES:

      

Management fees (see note 3)

   $ 59,686     $ 59,871     $ 40,569  

Performance-based incentive fees (see note 3)

     51,583       30,449       57,912  

Interest and other credit facility expenses

     48,919       55,772       34,375  

Administrative services expense

     4,794       3,450       2,437  

Insurance expense

     948       776       819  

Other general and administrative expenses

     4,740       4,360       3,700  
                        

Total expenses

     170,670       154,678       139,812  

Expense offset arrangement (see note 8)

     (217 )     (273 )     (128 )
                        

Net expenses

     170,453       154,405       139,684  
                        

Net investment income before excise taxes

     206,851       203,473       126,417  

Excise tax expense

     (520 )     (1,867 )     (1,099 )
                        

Net investment income

   $ 206,331     $ 201,606     $ 125,318  
                        

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, CASH EQUIVALENTS AND FOREIGN CURRENCIES:

      

Net realized gain (loss):

      

Investments and cash equivalents

     (125,005 )     93,261       149,653  

Foreign currencies

     41,265       (38,961 )     (16,771 )
                        

Net realized gain (loss)

     (83,740 )     54,300       132,882  
                        

Net change in unrealized gain (loss):

      

Investments and cash equivalents

     (784,388 )     (257,645 )     67,908  

Foreign currencies

     49,918       (31,699 )     (13,942 )
                        

Net change in unrealized gain (loss)

     (734,470 )     (289,344 )     53,966  
                        

Net realized and unrealized gain (loss) from investments, cash equivalents and foreign currencies

     (818,210 )     (235,044 )     186,848  
                        

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

   $ (611,879 )   $ (33,438 )   $ 312,166  
                        

EARNINGS (LOSS) PER SHARE (see note 5)

   $ (4.39 )   $ (0.30 )   $ 3.64  
                        

See notes to financial statements.

 

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APOLLO INVESTMENT CORPORATION

STATEMENTS OF CHANGES IN NET ASSETS

(in thousands, except shares)

 

     Year Ended March 31,  
     2009     2008     2007  

Increase (Decrease) in net assets from operations:

      

Net investment income

   $ 206,331     $ 201,606     $ 125,318  

Net realized gains (loss)

     (83,740 )     54,300       132,882  

Net change in unrealized gain (loss)

     (734,470 )     (289,344 )     53,966  
                        

Net increase (decrease) in net assets resulting from operations

     (611,879 )     (33,438 )     312,166  
                        

Dividends and distributions to stockholders (see note 13):

     (258,843 )     (230,889 )     (168,449 )
                        

Capital share transactions:

      

Net proceeds from shares sold

     369,589       285,545       443,605  

Less offering costs

     (637 )     (461 )     (986 )

Reinvestment of dividends

     —         27,403       33,557  
                        

Net increase in net assets from capital share transactions

     368,952       312,487       476,176  
                        

Total increase (decrease) in net assets:

     (501,770 )     48,160       619,893  

Net assets at beginning of period

     1,897,908       1,849,748       1,229,855  
                        

Net assets at end of period

   $ 1,396,138     $ 1,897,908     $ 1,849,748  
                        

Capital share activity

      

Shares sold

     22,327,500       14,950,000       20,700,000  

Shares issued from reinvestment of dividends

     —         1,436,069       1,615,812  
                        

Net increase in capital share activity

     22,327,500       16,386,069       22,315,812  
                        

See notes to financial statements.

 

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APOLLO INVESTMENT CORPORATION

STATEMENTS OF CASH FLOWS

(in thousands)

 

     Year Ended March 31,  
     2009     2008     2007  

Cash Flows from Operating Activities:

      

Net Increase (Decrease) in Net Assets Resulting from Operations

   $ (611,879 )   $ (33,438 )   $ 312,166  

Adjustments to reconcile net increase (decrease):

      

Purchase of investment securities

     (462,274 )     (1,857,850 )     (1,578,614 )

Proceeds from disposition of investment securities and cash equivalents

     340,168       809,223       1,004,012  

Increase (decrease) from foreign currency transactions

     41,265       (38,961 )     (16,771 )

Increase in interest and dividends receivable

     (21,089 )     (27,463 )     (17,141 )

Decrease (increase) in prepaid expenses and other assets

     749       (294 )     1,323  

Increase (decrease) in management and performance-based incentive fees payable

     (1,655 )     (16,610 )     30,730  

Increase (decrease) in interest payable

     (5,467 )     4,329       548  

Increase (decrease) in accrued expenses

     1,902       1,224       (810 )

Increase (decrease) in payable for investments and cash equivalents purchased

     (114,784 )     (992,292 )     193,498  

Increase (decrease) in receivables for securities sold

     —         28,248       (10,987 )

Net change in unrealized depreciation (appreciation) on investments, cash equivalents, foreign currencies and other assets and liabilities

     734,470       289,344       (53,966 )

Net realized loss (gain) on investments and cash equivalents

     83,740       (54,300 )     (132,882 )
                        

Net Cash Used by Operating Activities

   $ (14,854 )   $ (1,888,840 )   $ (268,894 )
                        

Cash Flows from Financing Activities:

      

Net proceeds from the issuance of common stock

   $ 369,589     $ 285,545     $ 443,605  

Offering costs from the issuance of common stock

     (637 )     (461 )     (986 )

Dividends paid in cash

     (231,233 )     (194,118 )     (134,892 )

Borrowings under credit facility

     1,739,502       2,990,313       2,179,863  

Repayments under credit facility

     (2,270,751 )     (1,875,396 )     (2,025,705 )
                        

Net Cash Provided (Used) by Financing Activities

   $ (393,530 )   $ 1,205,883     $ 461,885  
                        

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   $ (408,384 )   $ (682,957 )   $ 192,991  

Effect of exchange rates on cash balances

     8       (12 )     2  

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

   $ 414,983     $ 1,097,952     $ 904,959  
                        

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 6,607     $ 414,983     $ 1,097,952  
                        

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

      

Cash interest paid during the period

   $ 51,859     $ 48,265     $ 31,252  

Non-cash financing activities consist of the reinvestment of dividends totaling $0, $27,403 and $33,557, respectively.

See notes to financial statements.

 

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APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS

March 31, 2009

(in thousands)

 

Investments in Non-Controlled/Non-Affiliated Portfolio Companies

  Industry   Par
Amount*
  Cost   Fair
Value(1)

Subordinated Debt/Corporate Notes — 102.9%

       

AB Acquisitions UK Topco 2 Limited (Alliance Boots), GBP L+650, 7/9/17

  Retail   £ 39,526   $ 76,758   $ 39,942

Advanstar, Inc., L+700, 11/30/15

  Media   $ 24,385     24,385     1,341

Advantage Sales & Marketing, Inc.,
12.00%, 3/29/14

  Grocery     31,884     31,445     29,536

Allied Security Holdings LLC, 13.75%, 8/21/15

  Business Services     20,000     19,621     17,500

AMH Holdings II, Inc. (Associated Materials),
13.625%, 12/1/14 ¨

  Building Products     52,155     51,422     14,655

Angelica Corporation, 15.00%, 2/4/14

  Healthcare     60,000     60,000     60,000

Arbonne Intermediate Holdco Inc. (Natural Products Group LLC), 13.50%, 6/19/14 ***

  Direct Marketing     76,962     76,803     4,233

Babson CLO Ltd., Series 2008-2A Class E, L+975, 7/15/18 ¨

  Asset Management     11,000     9,993     8,104

Babson CLO Ltd., Series 2008-1A Class E, L+550, 7/20/18 ¨

  Asset Management     10,150     7,220     5,485

BNY ConvergEx Group, LLC, 14.00%, 10/2/14

  Business Services     15,611     15,611     13,879

Booz Allen Hamilton Inc., 13.00%, 7/31/16

  Consulting Services     23,435     23,073     20,857

Brenntag Holding GmbH & Co. KG, E+700, 12/23/15

  Chemicals   19,725     24,412     21,396

Catalina Marketing Corporation, 11.625%, 10/1/17 ¨

  Grocery   $ 31,959     30,327     27,165

Ceridian Corp., 12.25%, 11/15/15 †

  Diversified Service     50,000     50,000     42,750

Ceridian Corp., 11.25%, 11/15/15 †

  Diversified Service     36,000     35,140     31,788

Cidron Healthcare C S.á.R.L. (Convatec) E+950, 8/1/17

  Healthcare   7,668     12,028     8,603

Collect America, Ltd., 16.00%, 8/5/12 ¨

  Consumer Finance   $ 38,136     37,658     36,647

Delta Educational Systems, Inc., 14.20%, 5/12/13

  Education     19,271     18,777     19,126

DSI Renal Inc., 16.00%, 4/7/14

  Healthcare     11,357     11,357     9,647

Dura-Line Merger Sub, Inc., 14.00%, 9/22/14

  Telecommunications     41,218     40,561     39,033

Eurofresh, Inc., 0% / 14.50%, 1/15/14 ¨*** †

  Agriculture     26,504     24,303     199

Eurofresh, Inc., 11.50%, 1/15/13 ¨*** †

  Agriculture     50,000     50,000     11,250

European Directories (DH5) B.V., 15.735%, 7/1/16 †

  Publishing   2,961     3,777     3,356

European Directories (DH7) B.V., E+950, 7/1/15 †

  Publishing     16,643     20,695     19,114

First Data Corporation, 11.25%, 3/31/16 ¨

  Financial Services   $ 40,000     33,203     32,080

First Data Corporation, 9.875%, 9/24/15 †

  Financial Services     45,500     39,489     35,945

FleetPride Corporation, 11.50%, 10/1/14 ¨

  Transportation     47,500     47,500     40,375

Fox Acquisition Sub LLC, 13.375%, 7/15/16 ¨

  Broadcasting &
Entertainment
    25,000     24,785     20,825

See notes to financial statements.

 

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APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2009

(in thousands)

 

Investments in Non-Controlled/Non-Affiliated Portfolio Companies

  Industry   Par
Amount*
  Cost   Fair
Value(1)

Subordinated Debt/Corporate Notes — (continued)

       

FPC Holdings, Inc. (FleetPride Corporation),
0% / 14.00%, 6/30/15 ¨

  Transportation   $ 37,846   $ 36,826   $ 30,276

General Nutrition Centers, Inc., L+450, 3/15/14

  Retail     15,275     15,070     9,375

Goodman Global Inc., 13.50%, 2/15/16

  Manufacturing     25,000     25,000     24,025

Hub International Holdings, 10.25%, 6/15/15 ¨

  Insurance     25,000     24,160     19,666

Infor Lux Bond Company (Infor Global), L+800, 9/2/14

  Business Services     9,582     9,582     719

KAR Holdings, Inc., 10.00%, 5/1/15

  Transportation     48,225     44,404     27,488

Latham Manufacturing Corp., 20.00%, 12/30/12 ***

  Leisure Equipment     37,920     34,190     15,168

Laureate Education, Inc., 11.75%, 8/15/17 ¨

  Education     53,540     49,621     46,794

LVI Services, Inc., 14.75%, 11/16/12

  Environmental     47,523     47,523     44,790

MW Industries, Inc., 13.00%, 5/1/14

  Manufacturing     60,000     59,067     56,220

NCO Group Inc., 11.875%, 11/15/14

  Consumer Finance     22,630     18,487     19,427

Neff Corp., 10.00%, 6/1/15

  Rental Equipment     5,000     5,000     725

Nielsen Finance LLC, 0% / 12.50%, 8/1/16

  Market Research     61,000     47,500     37,430

OTC Investors Corporation (Oriental Trading Company), 13.50%, 1/31/15

  Direct Marketing     27,861     27,862     9,752

Pacific Crane Maintenance Company, L.P.,
13.00%, 2/15/14

  Machinery     34,170     34,170     22,210

PBM Holdings, Inc., 13.50%, 9/29/13

  Beverage, Food &
Tobacco
    17,723     17,723     16,128

Playpower Holdings Inc., 15.50%, 12/31/12 ¨

  Leisure Equipment     83,707     83,707     70,732

Pro Mach Merger Sub, Inc., 12.50%, 6/15/12

  Machinery     14,616     14,464     13,626

QHB Holdings LLC (Quality Home Brands),
14.50%, 12/20/13

  Consumer Products     50,938     50,273     36,293

Ranpak Holdings, Inc., 15.00%, 12/27/15

  Packaging     58,217     58,217     50,300

RSA Holdings Corp. of Delaware (American Safety Razor), 13.50%, 7/31/15

  Consumer Products     50,129     50,130     38,976

The Servicemaster Company, 10.75%, 7/15/15 ¨

  Diversified Service     67,173     60,832     54,343

TL Acquisitions, Inc. (Thomson Learning),
0% / 13.25%, 7/15/15 ¨

  Education     72,500     69,587     57,347

TL Acquisitions, Inc. (Thomson Learning),
10.50%, 1/15/15 ¨

  Education     47,500     46,777     40,185

TP Financing 2, Ltd. (Travelex), GBP L+725, 4/1/15

  Financial Services   £ 13,505     26,128     12,499

US Foodservice, 10.25%, 6/30/15 ¨

  Beverage, Food &
Tobacco
  $ 30,000     23,812     25,710

 

See notes to financial statements.

 

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APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2009

(in thousands, except shares)

 

Investments in Non-Controlled/Non-Affiliated Portfolio Companies

  Industry   Par
Amount*
  Cost   Fair
Value(1)

Subordinated Debt/Corporate Notes — (continued)

       

US Investigations Services, Inc.,
11.75%, 5/1/16 ¨

  Diversified Service   $ 14,639   $ 9,085   $ 11,901

US Investigations Services, Inc.,
10.50%, 11/1/15¨

  Diversified Service     9,500     7,991     8,075

Varietal Distribution, 10.75%, 6/30/17

  Distribution     21,875     21,288     15,269

WDAC Intermediate Corp., E+600, 11/29/15

  Publishing   46,320     62,591     379

Westbrook CLO Ltd., Series 2006-1A,
L+370, 12/20/20 ¨

  Asset Management   $ 11,000     6,509     5,389
               

Total Subordinated Debt/Corporate Notes

      $ 1,987,919   $ 1,436,048
               
        Shares        

Preferred Equity – 2.2%

       

AHC Mezzanine LLC (Advanstar) **

  Media     1   $ 1,063     —  

DSI Holding Company, Inc. (DSI Renal Inc.), 19.00%, 10/7/14

  Healthcare     32,500     31,970   $ 14,507

Gryphon Colleges Corporation (Delta Educational Systems, Inc.), 13.50%, 5/12/14

  Education     12,360     11,367     12,360

Gryphon Colleges Corporation (Delta Educational Systems, Inc.), 12.50% (Convertible)

  Education     332,500     3,325     3,325

Varietal Distribution Holdings, LLC, 8.00%

  Distribution     3,097     3,097     122
               

Total Preferred Equity

      $ 50,822   $ 30,314
               

Common Equity/Equity Interests — 13.8%

       

AB Capital Holdings LLC (Allied Security)

  Business Services     2,000,000   $ 2,000   $ 2,000

A-D Conduit Holdings, LLC (Duraline) **

  Telecommunications     2,778     2,778     3,760

AHC Mezzanine LLC (Advanstar) **

  Media     10,000     10,000     —  

CA Holding, Inc. (Collect America, Ltd.)
Series A

  Consumer Finance     25,000     2,500     4,162

CA Holding, Inc. (Collect America, Ltd.)
Series AA

  Consumer Finance     4,294     429     859

Clothesline Holdings, Inc. (Angelica)

  Healthcare     6,000     6,000     5,770

Explorer Coinvest LLC (Booz Allen)

  Consulting Services     430     4,300     7,376

FSC Holdings Inc. (Hanley Wood LLC) **

  Media     10,000     10,000     3,520

Garden Fresh Restaurant Holding, LLC **

  Retail     50,000     5,000     8,463

Gray Energy Services, LLC Class H
(Gray Wireline) **

  Oil & Gas     1,081     2,000     3,590

Gryphon Colleges Corporation (Delta Educational Systems, Inc.) **

  Education     17,500     175     —  

GS Prysmian Co-Invest L.P. (Prysmian Cables & Systems) (2,3)

  Industrial     1     —       43,264

 

See notes to financial statements.

 

48


Table of Contents

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2009

(in thousands, except shares and warrants)

 

Investments in Non-Controlled/Non-Affiliated Portfolio Companies

  Industry   Shares   Cost   Fair
Value(1)

Common Equity/Equity Interests — (continued)

       

Latham International, Inc.
(fka Latham Acquisition Corp.) **

  Leisure Equipment   33,091   $ 3,309     —  

LVI Acquisition Corp. (LVI Services, Inc.) **

  Environmental   6,250     2,500     —  

MEG Energy Corp. (4) **

  Oil & Gas   1,718,388     44,718   $ 43,706

New Omaha Holdings Co-Invest LP (First Data) **

  Financial Services   13,000,000     65,000     47,893

PCMC Holdings, LLC (Pacific Crane) **

  Machinery   40,000     4,000     847

Prism Business Media Holdings, LLC
(Penton Media, Inc.) **

  Media   68     14,947     3,443

Pro Mach Co-Investment, LLC **

  Machinery   150,000     1,500     3,158

RC Coinvestment, LLC (Ranpak Corp.) **

  Packaging   50,000     5,000     5,535

Sorenson Communications Holdings, LLC Class A

  Consumer Services   454,828     45     5,943

Varietal Distribution Holdings, LLC Class A **

  Distribution   28,028     28     —  
               

Total Common Equity and Equity Interests

      $ 186,229   $ 193,289
               
        Warrants        

Warrants — 0.3%

       

DSI Holding Company, Inc. (DSI Renal Inc.),
Common **

  Healthcare   5,011,327     —       —  

Fidji Luxco (BC) S.C.A., Common (FCI)(2) **

  Electronics   48,769   $ 491   $ 2,591

Gryphon Colleges Corporation (Delta Educational Systems, Inc.), Common **

  Education   9,820     98     —  

Gryphon Colleges Corporation (Delta Educational Systems, Inc.), Class A-1 Preferred **

  Education   45,947     460     655

Gryphon Colleges Corporation (Delta Educational Systems, Inc.), Class B-1 Preferred **

  Education   104,314     1,043     1,308

Latham International, Inc., Common

  Leisure Equipment   347,698     174     —  
               

Total Warrants

      $ 2,266   $ 4,554
               

 

See notes to financial statements.

 

49


Table of Contents

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2009

(in thousands)

 

Investments in Non-Controlled/Non-Affiliated Portfolio Companies

  Industry   Par
Amount*
  Cost   Fair
Value(1)

Bank Debt/Senior Secured Loans(5) — 47.0%

       

1st Lien Bank Debt/Senior Secured Loans — 0.1%

       

OTC Investors Corporation (Oriental Trading Company), 7/31/13

  Direct Marketing   $ 2,226   $ 1,155   $ 1,124
               

2nd Lien Bank Debt/Senior Secured Loans — 46.9%

       

AB Acquisitions UK Topco 2 Limited (Alliance Boots), 7/9/16 †

  Retail   £ 11,400   $ 19,792   $ 11,961

AB Acquisitions UK Topco 2 Limited (Alliance Boots), 7/9/16 †

  Retail   3,961     5,439     3,850

Advanstar Communications, Inc., 11/30/14

  Media   $ 20,000     20,000     6,680

Asurion Corporation, 7/3/15

  Insurance     150,300     148,798     122,795

BNY ConvergEx Group, LLC, 4/2/14

  Business Services     50,000     49,818     43,850

C.H.I. Overhead Doors, Inc., 13.00%, 10/22/11

  Building Products     15,000     15,018     11,250

Clean Earth, Inc., 13.00%, 8/1/14

  Environmental     25,000     25,000     22,750

Dresser, Inc., 5/4/15

  Industrial     61,000     60,924     47,266

Educate, Inc., 6/14/14

  Education     10,000     10,000     7,728

Garden Fresh Restaurant Corp., 12/22/11

  Retail     26,000     25,861     22,386

Generics International, Inc., 4/30/15

  Healthcare     20,000     19,917     16,343

Gray Wireline Service, Inc., 12.25%, 2/28/13

  Oil & Gas     77,500     76,966     77,500

Infor Enterprise Solutions Holdings, Inc.,
Tranche B-1, 3/2/14 †

  Business Services     5,000     5,000     950

Infor Enterprise Solutions Holdings, Inc.,
3/2/14 †

  Business Services     15,000     14,859     3,375

Infor Global Solutions European Finance
S.á.R.L., 3/2/14

  Business Services   6,210     8,263     1,484

IPC Systems, Inc., 6/1/15

  Telecommunications   $ 37,250     36,312     19,544

Kronos, Inc., 6/11/15

  Electronics     60,000     60,000     44,460

Penton Media, Inc., 2/1/14

  Media     14,000     10,650     9,884

Quality Home Brands Holdings LLC, 6/20/13

  Consumer Products     40,256     39,830     30,252

Ranpak Corp.(6), 12/27/14 †

  Packaging     12,500     12,500     11,108

Ranpak Corp.(7), 12/27/14 †

  Packaging   5,206     7,585     6,098

Sheridan Holdings, Inc., 6/15/15

  Healthcare   $ 60,000     60,000     49,860

Sorenson Communications, Inc., 2/18/14

  Consumer Services     62,103     62,103     54,443

TransFirst Holdings, Inc., 6/15/15

  Financial Services     34,750     33,683     28,669
               

Total 2nd Lien Bank Debt/Senior Secured Loans

      $ 828,318   $ 654,486
               

Total Bank Debt/Senior Secured Loans

      $ 829,473   $ 655,610
               

Total Investments in Non-Controlled/Non-Affiliated Portfolio Companies — 166.2%

      $ 3,056,709   $ 2,319,815
               

 

See notes to financial statements.

 

50


Table of Contents

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2009

(in thousands, except shares)

 

Investments in Controlled Portfolio Companies   Industry   Shares   Cost   Fair
Value(1)
 

Preferred Equity — 4.4%

       

Grand Prix Holdings, LLC Series A, 12.00% (Innkeepers USA)

  Hotels, Motels, Inns &
Gaming
  2,989,431   $ 74,736   $ 61,219  
                 

Common Equity/Equity Interests — 4.6%

       

AIC Credit Opportunity Fund LLC(8)

  Asset Management     $ 79,377   $ 57,294  

Grand Prix Holdings, LLC (Innkeepers USA) **

  Hotels, Motels, Inns &
Gaming
  17,335,834     172,664     7,570  
                 

Total Common Equity/Equity Interests

      $ 252,041   $ 64,864  
                 

Total Investments in Controlled Portfolio
Companies — 9.0%

      $ 326,777   $ 126,083  
                 

Total Investments — 175.2%(9)

      $ 3,383,486   $ 2,445,898  

Liabilities in Excess of Other Assets — (75.2%)

          (1,049,760 )
             

Net Assets — 100.0%

        $ 1,396,138  
             

 

(1) Fair value is determined by or under the direction of the Board of Directors of the Company (see Note 2).
(2) Denominated in Euro (€).
(3) The Company is the sole Limited Partner in GS Prysmian Co-Invest L.P.
(4) Denominated in Canadian dollars.
(5) Includes floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the LIBOR (London Inter-bank Offered Rate), EURIBOR (Euro Inter-bank Offered Rate), GBP LIBOR (London Inter-bank Offered Rate for British Pounds), or the prime rate. At March 31, 2009, the range of interest rates on floating rate bank debt was 4.92% to 9.16%.
(6) Position is held across five US Dollar-denominated tranches with varying yields.
(7) Position is held across three Euro-denominated tranches with varying yields.
(8) See Note 6.
(9) Aggregate gross unrealized appreciation for federal income tax purposes is $72,338; aggregate gross unrealized depreciation for federal income tax purposes is $1,016,662. Net unrealized depreciation is $944,324 based on a tax cost of $3,390,222.
¨ These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.
* Denominated in USD unless otherwise noted.
** Non-income producing security
*** Non-accrual status (see note 2m)
Denote securities where the Company owns multiple tranches of the same broad asset type but whose security characteristics differ. Such differences may include level of subordination, call protection and pricing, differing interest rate characteristics, among other factors. Such factors are usually considered in the determination of fair values.

 

See notes to financial statements.

 

51


Table of Contents

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

 

Industry Classification

   Percentage of Total
Investments (at fair value)
as of March 31, 2009

Education

     7.7%

Healthcare

     6.8%

Financial Services

     6.4%

Diversified Service

     6.1%

Insurance

     5.8%

Oil & Gas

     5.1%

Consumer Products

     4.3%

Transportation

     4.0%

Retail

     3.9%

Industrial

     3.7%

Leisure Equipment

     3.5%

Business Services

     3.4%

Manufacturing

     3.3%

Asset Management

     3.1%

Packaging

     3.0%

Hotels, Motels, Inns and Gaming

     2.8%

Environmental

     2.8%

Telecommunications

     2.6%

Consumer Finance

     2.5%

Consumer Services

     2.5%

Grocery

     2.3%

Electronics

     1.9%

Beverage, Food, & Tobacco

     1.7%

Machinery

     1.6%

Market Research

     1.5%

Consulting Services

     1.2%

Building Products

     1.1%

Media

     1.0%

Publishing

     0.9%

Chemicals

     0.9%

Broadcasting & Entertainment

     0.9%

Distribution

     0.6%

Direct Marketing

     0.6%

Agriculture

     0.5%

Rental Equipment

     0.0%
    

Total Investments

   100.0%
    

See notes to financial statements.

 

52


Table of Contents

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS

March 31, 2008

(in thousands)

 

Investments in Non-Controlled/Non-Affiliated Portfolio Companies

   Industry    Par
Amount*
   Cost    Fair
Value(1)

Subordinated Debt/Corporate Notes — 97.6%

           

AB Acquisitions UK Topco 2 Limited (Alliance Boots), GBP L+650, 7/9/17

   Retail    £ 38,156    $ 74,087    $ 72,612

Advanstar, Inc., L+700, 11/30/15

   Media    $ 22,115      22,115      22,225

Advantage Sales & Marketing, Inc., 12.00%, 3/29/14

   Grocery      31,245      30,746      31,245

AMH Holdings II, Inc. (Associated Materials),
13.625%, 12/1/14 ¨

   Building Products      50,314      49,501      50,314

Applied Systems, Inc., 12.50%, 9/26/14

   Business Services      22,000      21,903      21,120

Arbonne Intermediate Holdco Inc. (Natural Products Group LLC), 13.50%, 6/19/14

   Direct Marketing      67,395      67,221      37,067

Associated Materials, Inc., 0% / 11.25%, 3/1/14

   Building Products      43,415      31,846      29,522

BNY ConvergEx Group, LLC, 14.00%, 10/2/14

   Business Services      15,304      15,304      15,304

Brenntag Holding GmbH & Co. KG, E+700, 12/23/15

   Chemicals    19,135      23,548      24,221

Catalina Marketing Corporation, L+500, 10/1/17

   Grocery    $ 31,959      30,218      28,124

Ceridian Corp., 12.25%, 11/15/15

   Diversified Service      50,000      50,000      41,750

Ceridian Corp., 11.25%, 11/15/15

   Diversified Service      31,000      30,539      26,376

Collect America, Ltd., 13.50%, 8/5/12 ¨

   Consumer Finance      36,320      35,792      36,320

Delta Educational Systems, Inc., 16.00%, 5/12/13

   Education      18,789      18,210      18,789

DSI Renal Inc., 14.00%, 4/7/14

   Healthcare      10,404      10,404      10,404

Dura-Line Merger Sub, Inc., 13.25%, 9/22/14

   Telecommunications      40,461      39,732      40,461

Energy Future Holdings, 11.25%, 11/1/17

   Utilities      25,000      24,466      24,750

Eurofresh, Inc., 0% / 14.50%, 1/15/14 ¨

   Agriculture      26,504      21,467      10,602

Eurofresh, Inc., 11.50%, 1/15/13 ¨

   Agriculture      50,000      50,000      31,750

European Directories (DH5) B.V., 15.735%, 7/1/16

   Publishing    2,539      3,153      3,439

European Directories (DH7) B.V., E+950, 7/1/15

   Publishing    15,867      19,546      22,628

First Data Corporation, L+525, 3/31/16

   Financial Services    $ 100,000      79,000      79,000

First Data Corporation, 9.875%, 9/24/15 ¨

   Financial Services      45,500      38,946      37,860

FleetPride Corporation, 11.50%, 10/1/14 ¨

   Transportation      47,500      47,500      45,837

FPC Holdings, Inc. (FleetPride Corporation), 0% / 14.00%, 6/30/15 ¨

   Transportation      37,846      33,179      33,304

General Nutrition Centers, Inc., L+450, 3/15/14 ¨

   Retail      29,775      29,296      24,862

Goodman Global Inc., 13.50%, 2/15/16 ¨

   Manufacturing      25,000      25,000      24,625

Hub International Holdings, 10.25%, 6/15/15 ¨

   Insurance      20,000      20,000      13,900

HydroChem Holding, Inc., 13.50%, 12/8/14

   Environmental      20,226      20,226      19,720

See notes to financial statements.

 

53


Table of Contents

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2008

(in thousands)

 

Investments in Non-Controlled/Non-Affiliated Portfolio Companies

  Industry   Par
Amount*
  Cost   Fair
Value(1)

Subordinated Debt/Corporate Notes — (continued)

       

Infor Lux Bond Company (Infor Global), L+800, 9/2/14

  Business Services   $ 8,611   $ 8,611   $ 6,361

KAR Holdings, Inc., 10.00%, 5/1/15

  Transportation     43,225     39,816     38,092

Language Line Holdings, Inc., 0% / 14.125%, 6/15/13

  Business Services     27,678     24,468     22,641

Language Line Inc., 11.125%, 6/15/12

  Business Services     27,081     26,863     27,623

Latham Manufacturing Corp., 14.00%, 12/30/12

  Leisure Equipment     34,467     33,980     34,467

Laureate Education, Inc., L+550, 8/15/17

  Education     53,540     49,385     47,115

Lexicon Marketing (USA), Inc., 13.25%, 5/11/13***

  Direct Marketing     28,482     28,482     —  

LVI Services, Inc., 14.50%, 11/16/12

  Environmental     45,302     45,302     45,302

MW Industries, Inc., 13.00%, 5/1/14

  Manufacturing     60,000     58,946     60,000

Neff Corp., 10.00%, 6/1/15

  Rental Equipment     5,000     5,000     2,395

Nielsen Finance LLC, 0% / 12.50%, 8/1/16

  Market Research     61,000     41,572     38,926

OTC Investors Corporation (Oriental Trading Company), 13.50%, 1/31/15

  Direct Marketing     24,407     24,407     24,407

Pacific Crane Maintenance Company, L.P.,
13.00%, 2/15/14

  Machinery     34,000     34,000     34,000

PBM Holdings, Inc., 13.50%, 9/29/13

  Beverage, Food &
Tobacco
    17,723     17,723     17,014

Playpower Holdings Inc., 15.50%, 12/31/12 ¨

  Leisure Equipment     72,098     72,098     72,098

Plinius Investments II B.V. (Casema), E+925, 9/13/16

  Cable TV   17,701     23,060     26,841

Pro Mach Merger Sub, Inc., 12.50%, 6/15/12

  Machinery   $ 14,598     14,411     14,598

QHB Holdings LLC (Quality Home Brands),
13.50%, 12/20/13

  Consumer
Products
    44,331     43,442     44,331

Ranpak Holdings, Inc., 15.00%, 12/27/15

  Packaging     50,125     50,125     50,125

RSA Holdings Corp. of Delaware (American Safety Razor), 13.50%, 7/31/15

  Consumer
Products
    43,817     43,817     43,817

Safety Products Holdings LLC, 11.75%, 1/1/12

  Manufacturing     34,043     33,662     34,405

Serpering Investments B.V. (Casema), E+925, 9/13/16

  Cable TV   16,403     20,752     25,014

The Servicemaster Company, L+500, 7/15/15

  Diversified Service   $ 67,173     60,177     51,051

TL Acquisitions, Inc. (Thomson Learning),
0% / 13.25%, 7/15/15 ¨

  Education     72,500     61,153     52,109

TL Acquisitions, Inc. (Thomson Learning),
10.50%, 1/15/15 ¨

  Education     47,500     46,680     41,681

TP Financing 2, Ltd. (Travelex), GBP L+725, 4/1/15

  Financial Services   £ 11,862     23,047     19,748

US Investigations Services, Inc., 10.50%, 11/1/15 ¨

  Diversified Service   $ 7,500     6,131     6,188

Varietal Distribution, 10.25%, 7/15/15

  Distribution     15,000     15,000     14,112

Varietal Distribution, 10.75%, 6/30/17

  Distribution     21,875     21,247     19,359

WDAC Intermediate Corp., E+600, 11/29/15

  Publishing   41,611     55,902     45,607

Yankee Acquisition Corp., 9.75%, 2/15/17

  Retail   $ 17,000     16,971     13,579

 

See notes to financial statements.

 

54


Table of Contents

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2008

(in thousands, except shares)

 

Investments in Non-Controlled/Non-Affiliated Portfolio Companies

  Industry   Par
Amount*
  Cost   Fair
Value(1)

Subordinated Debt/Corporate Notes — (continued)

       

Yankee Acquisition Corp., 8.50%, 2/15/15

  Retail   $ 1,915   $ 1,546   $ 1,558
               

Total Subordinated Debt/Corporate Notes

      $ 2,010,721   $ 1,852,695
               
        Shares        

Preferred Equity — 5.6%

       

DSI Holding Company, Inc. (DSI Renal Inc.),
15.00%, 10/7/14

  Healthcare     32,500   $ 31,875   $ 32,500

Exco Resources, Inc., 7.00% / 9.00% (Convertible)

  Oil & Gas     975     9,750     10,871

Exco Resources, Inc., 7.00% / 9.00% Hybrid (Convertible)

  Oil & Gas     4,025     40,250     44,879

Gryphon Colleges Corporation (Delta Educational Systems, Inc.), 13.50%, 5/12/14

  Education     12,360     11,180     12,360

Gryphon Colleges Corporation (Delta Educational Systems, Inc.), 12.50% (Convertible)

  Education     3,325     3,325     1,369

LVI Acquisition Corp. (LVI Services, Inc.), 14.00%

  Environmental     1,875     1,875     529

Varietal Distribution Holdings, LLC, 8.00%

  Distribution     3,097     3,097     3,097
               

Total Preferred Equity

      $ 101,352   $ 105,605
               

Common Equity/Partnership Interests — 15.5%

       

A-D Conduit Holdings, LLC (Duraline) **

  Telecommunications     2,778   $ 2,778   $ 3,730

AHC Mezzanine LLC (Advanstar)

  Media     10,000     10,000     9,000

CA Holding, Inc. (Collect America, Ltd.)

  Consumer Finance     25,000     2,500     3,720

DTPI Holdings, Inc. (American Asphalt & Grading) **

  Infrastructure     200,000     2,000     —  

FSC Holdings Inc. (Hanley Wood LLC) **

  Media     10,000     10,000     10,000

Garden Fresh Restaurant Holding, LLC **

  Retail     50,000     5,000     4,832

Gray Energy Services, LLC Class H (Gray Wireline) **

  Oil & Gas     1,081     2,000     3,540

Gryphon Colleges Corporation (Delta Educational Systems, Inc.) **

  Education     175     175     —  

GS Prysmian Co-Invest L.P. (Prysmian Cables & Systems) (2,3)

  Industrial       —       93,073

Latham International, Inc.

(fka Latham Acquisition Corp.) **

  Leisure Equipment     33,091     3,309     1,127

LM Acquisition Ltd. (Lexicon Marketing Inc.) **

  Direct Marketing     10,000     10,000     —  

LVI Acquisition Corp. (LVI Services, Inc.) **

  Environmental     6,250     625     —  

MEG Energy Corp. (4) **

  Oil & Gas     1,718,388     44,718     68,665

New Omaha Holdings Co-Invest LP (First Data)

  Financial Services     13,000,000     65,000     65,000

PCMC Holdings, LLC (Pacific Crane)

  Machinery     40,000     4,000     3,607

 

See notes to financial statements.

 

55


Table of Contents

APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2008

(in thousands, except shares and warrants)

 

Investments in Non-Controlled/Non-Affiliated Portfolio Companies

   Industry    Shares    Cost    Fair
Value(1)

Common Equity/Partnership Interests — (continued)

           

Prism Business Media Holdings, LLC

   Media      68    $ 14,947    $ 14,810

Pro Mach Co-Investment, LLC **

   Machinery      150,000      1,500      3,103

RC Coinvestment, LLC (Ranpak Corp.)

   Packaging      50,000      5,000      5,047

Sorenson Communications Holdings, LLC Class A**

   Consumer Services      454,828      45      5,436

Varietal Distribution Holdings, LLC Class A

   Distribution      28,028      28      88
                   

Total Common Equity and Partnership Interests

         $ 183,625    $ 294,778
                   
          Warrants          

Warrants — 0.6%

           

DSI Holdings Company, Inc. (DSI Renal Inc.), Common **

   Healthcare      5,011,327      —      $ 2,920

Fidji Luxco (BC) S.C.A., Common (FCI)(2) **

   Electronics      48,769    $ 491      7,604

Gryphon Colleges Corporation (Delta Educational Systems, Inc.), Common **

   Education      98      98      —  

Gryphon Colleges Corporation (Delta Educational Systems, Inc.), Class A-1 Preferred **

   Education      459      460      579

Gryphon Colleges Corporation (Delta Educational Systems, Inc.), Class B-1 Preferred **

   Education      1,043      1,043      430
                   

Total Warrants

         $ 2,092    $ 11,533
                   
          Par
Amount*
         

2nd Lien Bank Debt/Senior Secured Loans (5) — 38.1%

           

Advanstar Communications, Inc., 11/30/14

   Media    $ 20,000    $ 20,000    $ 14,600

American Asphalt & Grading Co., 7/10/09

   Infrastructure      31,596      31,596      8,200

Asurion Corporation, 7/3/15

   Insurance      135,300      134,876      116,020

BNY Convergex Group, LLC, 4/2/14

   Business Services      50,000      49,787      43,000

C.H.I. Overhead Doors, Inc., 10/22/11

   Building Products      15,000      15,023      14,175

Clean Earth, Inc., 8/1/14

   Environmental      25,000      25,000      24,875

Dresser, Inc., 5/4/15

   Industrial      61,000      60,915      55,663

Educate, Inc., 6/14/14

   Education      10,000      10,000      8,500

Garden Fresh Restaurant Corp., 12/22/11

   Retail      26,000      25,821      25,480

Generics International, Inc., 4/30/15

   Healthcare      20,000      19,903      19,875

Gray Wireline Service, Inc., 12.25%, 2/28/13

   Oil & Gas      77,500      76,866      77,500

HydroChem Industrial Services, Inc., 12/8/14

   Environmental      35,100      35,100      34,223

 

See notes to financial statements.

 

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APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2008

(in thousands, except shares)

 

Investments in Non-Controlled/Non-Affiliated Portfolio Companies

  Industry   Par
Amount*
  Cost   Fair
Value(1)
 

2nd Lien Bank Debt/Senior Secured Loans (5) — (continued)

       

Infor Enterprise Solutions Holdings, Inc.,
Tranche B-1, 3/2/14

  Business Services   $ 5,000   $ 5,000   $ 4,125  

Infor Enterprise Solutions Holdings, Inc., 3/2/14

  Business Services     15,000     14,836     12,375  

Infor Global Solutions European Finance
S.á.R.L., 3/2/14

  Business Services   6,210     8,263     8,856  

IPC Systems, Inc., 6/1/15

  Telecommunications   $ 37,250     36,167     26,634  

Kronos, Inc., 6/11/15

  Electronics     60,000     60,000     44,100  

Quality Home Brands Holdings LLC, 6/20/13

  Consumer Products     40,000     39,504     32,000  

Ranpak Corp.(6), 12/27/14

  Packaging     12,500     12,500     12,500  

Ranpak Corp.(7), 12/27/14

  Packaging   5,206     7,584     8,249  

Sheridan Holdings, Inc., 6/15/15

  Healthcare   $ 60,000     60,000     46,500  

Sorenson Communications, Inc., 2/18/14

  Consumer Services     62,103     62,103     60,705  

TransFirst Holdings, Inc., 6/15/15

  Financial Services     30,500     30,413     23,790  
                 

Total 2nd Lien Bank Debt/Senior Secured Loans

      $ 841,257   $ 721,945  
                 

Total Investments in Non-Controlled/Non-Affiliated Portfolio Companies – 157.4%

      $ 3,139,047   $ 2,986,556  
                 

Investments in Controlled Portfolio Companies

      Shares          

Preferred Equity — 3.9%

       

Grand Prix Holdings, LLC Series A, 12.00% (Innkeepers USA)

  Hotels, Motels,
Inns & Gaming
    2,989,431     74,736     74,736  
                 

Common Equity — 9.1%

       

Grand Prix Holdings, LLC (Innkeepers USA)

  Hotels, Motels,
Inns & Gaming
    17,335,834     172,664     172,256  
                 

Total Investments in Controlled Portfolio
Companies — 13.0%

      $ 247,400   $ 246,992  
                 

Total Investments

      $ 3,386,447   $ 3,233,548  
                 
        Par
Amount*
         

Cash Equivalents — 21.3%

       

U.S. Treasury Bill, 1.075%, 6/19/08

  Government   $ 405,000   $ 404,063   $ 403,898  
                 

Total Investments & Cash Equivalents —191.7% (8)

      $ 3,790,510   $ 3,637,446  

Liabilities in Excess of Other Assets — (91.7%)

          (1,739,538 )
             

Net Assets — 100.0%

        $ 1,897,908  
             

 

See notes to financial statements.

 

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APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

March 31, 2008

(in thousands)

 

 

(1) Fair value is determined by or under the direction of the Board of Directors of the Company (see Note 2).
(2) Denominated in Euro (€).
(3) The Company is the sole Limited Partner in GS Prysmian Co-Invest L.P.
(4) Denominated in Canadian dollars.
(5) Includes floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the LIBOR (London Inter-bank Offered Rate), EURIBOR (Euro Inter-bank Offered Rate), GBP LIBOR (London Inter-bank Offered Rate for British Pounds), or the prime rate. At March 31, 2008, the range of interest rates on floating rate bank debt was 7.67% - 12.38%.
(6) Position is held across five US Dollar-denominated tranches with varying yields.
(7) Position is held across three Euro-denominated tranches with varying yields.
(8) Aggregate gross unrealized appreciation for federal income tax purposes is $160,652; aggregate gross unrealized depreciation for federal income tax purposes is $321,299. Net unrealized depreciation is $160,647 based on a tax cost of $3,798,093.
¨ These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.
* Denominated in USD unless otherwise noted.
** Non-income producing security
*** Non-accrual status

 

See notes to financial statements.

 

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APOLLO INVESTMENT CORPORATION

SCHEDULE OF INVESTMENTS (continued)

 

Industry Classification

   Percentage of Total
Investments (at
fair value) as of
March 31, 2008

Hotels, Motels, Inns and Gaming

     7.6%

Financial Services

     7.0%

Oil & Gas

     6.4%

Education

     5.7%

Business Services

     5.0%

Industrial

     4.6%

Retail

     4.4%

Insurance

     4.0%

Diversified Service

     3.9%

Environmental

     3.9%

Consumer Products

     3.7%

Manufacturing

     3.7%

Transportation

     3.6%

Healthcare

     3.5%

Leisure Equipment

     3.3%

Building Products

     2.9%

Packaging

     2.3%

Publishing

     2.2%

Telecommunications

     2.2%

Media

     2.2%

Consumer Services

     2.0%

Direct Marketing

     1.9%

Grocery

     1.8%

Machinery

     1.7%

Cable TV

     1.6%

Electronics

     1.6%

Agriculture

     1.3%

Consumer Finance

     1.2%

Market Research

     1.2%

Distribution

     1.1%

Utilities

     0.8%

Chemicals

     0.8%

Beverage, Food, & Tobacco

     0.5%

Infrastructure

     0.3%

Rental Equipment

     0.1%
    

Total Investments

   100.0%
    

See notes to financial statements.

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS

(in thousands except share and per share amounts)

Note 1. Organization

Apollo Investment Corporation, a Maryland corporation organized on February 2, 2004, is a closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940. In addition, for tax purposes we have elected to be treated as a regulated investment company (“RIC”), under the Internal Revenue Code of 1986, as amended. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in middle-market companies in the form of mezzanine and senior secured loans, each of which may include an equity component, and, to a lesser extent, by making equity investments in such companies.

Apollo Investment commenced operations on April 8, 2004 receiving net proceeds of $870,000 from its initial public offering selling 62 million shares of common stock at a price of $15.00 per share.

Note 2. Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.

Our financial statements are prepared in accordance with GAAP and pursuant to the requirements for reporting on Form 10-K and Regulation S-X, as appropriate. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements have been included.

The significant accounting policies consistently followed by Apollo Investment are:

(a) Security transactions are accounted for on the trade date;

(b) Under procedures established by our Board of Directors, we value investments, including certain subordinated debt, senior secured debt and other debt securities with maturities greater than 60 days, for which market quotations are readily available, at such market quotations (unless they are deemed not to represent fair value). We typically obtain market quotations from at least two brokers or dealers (if available, otherwise from a principal market maker or a primary market dealer or other independent pricing service). We utilize mid-market pricing as a practical expedient for fair value unless a different point within the range is more representative. If and when market quotations are deemed not to represent fair value, we typically utilize independent third party valuation firms to assist us in determining fair value. Investments maturing in 60 days or less are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. Debt and equity securities that are not publicly traded or whose market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of our Board of Directors. Such determination of fair values may involve subjective judgments and estimates.

With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our board of directors has approved a multi-step valuation process each quarter, as described below:

(1) our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our investment adviser responsible for the portfolio investment;

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

(2) preliminary valuation conclusions are then documented and discussed with senior management of our investment adviser;

(3) independent valuation firms engaged by our board of directors conduct independent appraisals and review our investment adviser’s preliminary valuations and make their own independent assessment;

(4) the audit committee of the board of directors reviews the preliminary valuation of our investment adviser and that of the independent valuation firm and responds to the valuation recommendation of the independent valuation firm to reflect any comments; and

(5) 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, the respective independent valuation firm and the audit committee.

Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, our principal market (as the reporting entity) and enterprise values, among other factors.

In September, 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. We adopted this statement for our first fiscal quarter ended June 30, 2008.

SFAS No. 157 classifies the inputs used to measure these fair values into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable inputs for the asset or liability.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment.

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

On October 10, 2008, FASB Staff Position 157-3—Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (“FAS 157-3”) was issued. FAS 157-3 provides examples of how to determine fair value in a market that is not active. FAS 157-3 did not change the fair value measurement principles set forth in FAS 157. Furthermore, on April 9, 2009, FASB Staff Position 157-4—Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FAS 157-4”) was issued. FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. According to FAS 157-4, in the above circumstances, more analysis and significant adjustments to transaction or quoted prices may be necessary to estimate fair value. FAS 157-4 is effective for periods ending after June 15, 2009. We are currently reviewing FAS 157-4 and the future impact, if any, it will have on our financial position or results of operations.

(c) Gains or losses on the sale of investments are calculated by using the specific identification method.

(d) Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination and/or commitment fees associated with debt investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination and/or commitment fees are recorded as interest income. Structuring fees are recorded as other income when earned.

(e) The Company intends to comply with the applicable provisions of the Internal Revenue Code of 1986, as amended, pertaining to regulated investment companies to make distributions of taxable income sufficient to relieve it from substantially all Federal income taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. The Company will accrue excise tax on estimated excess taxable income as required.

(f) Book and tax basis differences relating to stockholder dividends and distributions and other permanent book and tax differences are reclassified among the Company’s capital accounts. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from accounting principles generally accepted in the United States of America; accordingly, at March 31, 2009, $123,207 was reclassified on our balance sheet between accumulated net realized gain (loss) and undistributed net investment income and $520 was reclassified on our balance sheet between undistributed net investment income and paid-in capital in excess of par. Total earnings and net asset value is not affected;

(g) Dividends and distributions to common stockholders are recorded as of the record date. The amount to be paid out as a dividend is determined by the Board of Directors each quarter. Net realized capital gains, if any, are distributed or deemed distributed at least annually.

(h) In accordance with Regulation S-X and the AICPA Audit and Accounting Guide for Investment Companies, the Company does not consolidate its interest in any company other than in investment company subsidiaries and controlled operating companies substantially all of whose business consists of providing services to the Company. Consequently, the Company does not consolidate special purpose entities through which it holds investments subject to financing with third parties. See note 6.

(i) The accounting records of the Company are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. The Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. The Company’s investments in foreign securities may involve

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

certain risks such as foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments and therefore the earnings of the Company.

(j) The Company may enter into forward exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled.

(k) The Company records origination expenses related to its multi-currency revolving credit facility as prepaid assets. These expenses are deferred and amortized using the straight-line method over the stated life of the facility.

(l) The Company records registration expenses related to Shelf filings as prepaid assets. These expenses are charged as a reduction of capital upon utilization, in accordance with the AICPA Audit and Accounting Guide for Investment Companies.

(m) Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more and/or when there is reasonable doubt that principal or interest will be collected. Accrued, uncapitalized interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and in management’s judgment, are likely to remain current.

(n) In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes. FIN 48 was effective for financial statements issued for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation requires recognition of the impact of a tax position if that position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In addition, FIN 48 provides measurement guidance whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit to recognize in the financial statements. FIN 48 was adopted on April 1, 2007 and did not have a material impact on the Company’s financial condition or results of operations. If the tax law requires interest and/or penalties to be paid on an underpayment of income taxes, interest and penalties will be classified as income taxes on our financial statements, if applicable.

Note 3. Agreements

Apollo Investment has an Investment Advisory and Management Agreement with the Investment Adviser, AIM, under which the Investment Adviser, subject to the overall supervision of Apollo Investment’s Board of Directors, will manage the day-to-day operations of, and provide investment advisory services to, Apollo Investment. For providing these services, the Investment Adviser receives a fee from Apollo Investment, consisting of two components—a base management fee and an incentive fee. The base management fee is determined by taking the average value of Apollo Investment’s gross assets at the end of the two most recently completed calendar quarters calculated at an annual rate of 2.00%. The incentive fee has two parts, as follows: one part is calculated and payable quarterly in arrears based on Apollo Investment’s pre-incentive fee net

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus Apollo Investment’s 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 issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income does not include any realized capital gains computed net of all realized capital losses and unrealized capital depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of Apollo Investment’s net assets at the end of the immediately preceding calendar quarter, is compared to the rate of 1.75% per quarter (7% annualized). Our net investment income used to calculate this part of the incentive fee is also included in the amount of our gross assets used to calculate the 2% base management fee. Apollo Investment pays the Investment Adviser an incentive fee with respect to Apollo Investment’s pre-incentive fee net investment income in each calendar quarter as follows: (1) no incentive fee in any calendar quarter in which Apollo Investment’s pre-incentive fee net investment income does not exceed 1.75%, which we commonly refer to as the performance threshold; (2) 100% of Apollo Investment’s pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds 1.75% but does not exceed 2.1875% in any calendar quarter; and (3) 20% of the amount of Apollo Investment’s pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter. These calculations are appropriately pro rated for any period of less than three months. The effect of the fee calculation described above is that if pre-incentive fee net investment income is equal to or exceeds 2.1875%, the Investment Adviser will receive a fee of 20% of Apollo Investment’s pre-incentive fee net investment income for 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 Investment Advisory and Management Agreement, as-of the termination date) and will equal 20% of Apollo Investment’s cumulative realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the Investment Adviser.

For the fiscal years ended March 31, 2009, 2008 and 2007, the Investment Adviser accrued $59,686, $59,871 and $40,569, respectively, in base investment advisory and management fees and $51,583, $30,449 and $57,912, respectively, in performance-based incentive fees from Apollo Investment.

Apollo Investment has also entered into an Administration Agreement with Apollo Investment Administration, LLC (the “Administrator”) under which the Administrator provides administrative services for Apollo Investment. For providing these services, facilities and personnel, Apollo Investment reimburses the Administrator for Apollo Investment’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent and Apollo Investment’s allocable portion of its chief financial officer and chief compliance officer and their respective staffs. The Administrator will also provide, on Apollo Investment’s behalf, managerial assistance to those portfolio companies to which Apollo Investment is required to provide such assistance.

At the fiscal years ended March 31, 2009, 2008 and 2007, the Administrator was reimbursed $3,247, $3,162 and $2,237, respectively, from Apollo Investment on the $4,794, $3,450 and $2,437, respectively, of expenses accrued under the Administration Agreement.

On April 14, 2005, Apollo Investment entered into an $800,000 Senior Secured Revolving Credit Agreement (the “Facility”), among Apollo Investment, the lenders party thereto and JPMorgan Chase Bank, N.A. (“JPMorgan”),

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

as administrative agent for the lenders. Effective December 29, 2005, lenders provided additional commitments in the amount of $100,000, increasing the total facility size to $900,000 on the same terms and conditions as the existing commitments. On March 31, 2006, Apollo Investment Corporation amended and restated its $900,000 senior secured, multi-currency, revolving credit facility due April 14, 2010. The amended Facility increased total commitments outstanding to $1,250,000 and extended the maturity date to April 13, 2011. The amended Facility also permits Apollo Investment to seek additional commitments from new and existing lenders in the future, up to an aggregate amount not to exceed $2,000,000. In February 2007, Apollo Investment increased total commitments to $1,700,000 under the Facility with the same terms. Pricing remains at 100 basis points over LIBOR. The Facility is used to supplement Apollo’s equity capital to make additional portfolio investments and for general corporate purposes. From time to time, certain of the lenders provide customary commercial and investment banking services to affiliates of Apollo Investment. JPMorgan also serves as custodian and fund accounting agent for Apollo Investment.

Note 4. Net Asset Value Per Share

At March 31, 2009, the Company’s total net assets and net asset value per share were $1,396,138 and $9.82, respectively. This compares to total net assets and net asset value per share at March 31, 2008 of $1,897,908 and $15.83, respectively.

Note 5. Earnings (Loss) Per Share

The following information sets forth the computation of basic and diluted earnings (loss) per share for the years ended March 31, 2009, 2008 and 2007, respectively:

 

     Year Ended March 31,
     2009     2008     2007

Numerator for increase (decrease) in net assets per share:

   $ (611,879 )   $ (33,438 )   $ 312,166

Denominator for basic and diluted weighted average shares:

     139,468,630       112,049,771       85,791,821

Basic and diluted earnings (loss) per share:

   $ (4.39 )   $ (0.30 )   $ 3.64

Note 6. Investments

AIC Credit Opportunities Fund LLC—We own all of the common member interests in AIC Credit Opportunity Fund LLC (“AIC Holdco”), which was formed for the purpose of holding various financed investments. Effective in June 2008 and through AIC Holdco, we invested $39,500 in a special purpose entity wholly owned by AIC Holdco, AIC (FDC) Holdings LLC (“Apollo FDC”), which was used to purchase a Junior Profit-Participating Note due 2013 in principal amount of $39,500 (the “Junior Note”) from Apollo I Trust (the “Trust”). The Trust also issued a Senior Floating Rate Note due 2013 (the “Senior Note”) to an unaffiliated third party (“FDC Counterparty”) in principal amount of $39,500 paying interest at Libor plus 1.50%, increasing over time to Libor plus 2.0%. The Trust used the aggregate $79,000 proceeds to acquire $100,000 face value of a senior subordinated loan of First Data Corporation (the “FDC Reference Obligation”) due 2016 and paying interest at 11.25% per year. The Junior Note generally entitles Apollo FDC to the net interest and other proceeds due under the FDC Reference Obligation after payment of interest due under the Senior Notes, as described above. In addition, Apollo FDC is subject to 100% of any realized appreciation or depreciation in the FDC Reference Obligation. However, since the Senior Note is a non-recourse obligation, Apollo FDC is only exposed up to the amount of equity used by AIC Holdco to fund the purchase of the Junior Note plus any additional margin Apollo decides to post, if any, during the term of the financing.

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

Through AIC Holdco, effective in June 2008, we invested $11,375 in a special purpose entity wholly owned by AIC Holdco, AIC (TXU) Holdings LLC (“Apollo TXU”), which acquired exposure to $50,000 notional amount of a Libor plus 3.5% senior secured delayed draw term loan of Texas Competitive Electric Holdings (“TXU”) due 2014 through a non-recourse total return swap with an unaffiliated third party expiring on October 10, 2013 and pursuant to which Apollo TXU pays interest at Libor plus 1.5% and generally receives all proceeds due under the delayed draw term loan of TXU (the “TXU Reference Obligation”). Like Apollo FDC, Apollo TXU is entitled to 100% of any realized appreciation in the TXU Reference Obligation and, since the total return swap is a non-recourse obligation, is exposed up to the amount of equity used by AIC Holdco to fund the investment in the total return swap, plus any additional margin we decide to post, if any, during the term of the financing.

Through AIC Holdco, effective in September 2008, we invested $10,022 equivalent, in a special purpose entity wholly owned by AIC Holdco, AIC (Boots) Holdings, LLC (“Apollo Boots”), which acquired €23,383 and £12,465 principal amount of senior term loans of AB Acquisitions Topco 2 Limited, a holding company for the Alliance Boots group of companies (the “Boots Reference Obligations”), out of the proceeds of our investment and a multicurrency $40,876 equivalent non-recourse loan to Apollo Boots (the “Acquisition Loan”) by an unaffiliated third party that matures in September 2013 and pays interest at LIBOR plus 1.25% or, in certain cases, the higher of the Federal Funds Rate plus 0.50% or the lender’s prime-rate. The Boots Reference Obligations pay interest at the rate of LIBOR plus 3% per year and mature in June 2015.

Pursuant to applicable investment company accounting, we do not consolidate AIC Holdco or its wholly owned subsidiaries and accordingly only the value of our investment in AIC Holdco is included on our balance sheet. The Senior Note, total return swap and Acquisition Loan are non-recourse to AIC Holdco, its subsidiaries and us and have standard events of default including failure to pay contractual amounts when due and failure by each of the underlying Apollo Investment special purpose entities to provide additional credit support, sell assets or prepay a portion of its obligations if the value of the FDC Reference Obligation, the TXU Reference Obligation or the Boots Reference Obligation, as applicable, declines below specified levels. We may unwind any of these transactions at any time without penalty. From time to time Apollo Investment may provide additional capital to AIC Holdco for purposes of funding margin calls under one or more of the transactions described above. During the fiscal year ended March 31, 2009, we provided $18,480 in additional capital to AIC Holdco.

Investments and cash equivalents consisted of the following as of March 31, 2009 and March 31, 2008.

 

     March 31, 2009    March 31, 2008
     Cost    Fair Value    Cost    Fair Value

Subordinated Debt/Corporate Notes

   $ 1,987,919    $ 1,436,048    $ 2,010,721    $ 1,852,695

Preferred Equity

     125,558      91,533      176,088      180,341

Common Equity/Partnership Interests

     438,270      258,153      356,289      467,034

Warrants

     2,266      4,554      2,092      11,533

Bank Debt/Senior Secured Loans

     829,473      655,610      841,257      721,945

Cash Equivalents

     —        —        404,063      403,898
                           

Totals

   $ 3,383,486    $ 2,445,898    $ 3,790,510    $ 3,637,446

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

At March 31, 2009, our investments and cash equivalents were categorized as follows in the fair value hierarchy for SFAS No. 157 purposes:

 

          Fair Value Measurement at Reporting Date Using:

Description

   March 31,
2009
   Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)

Cash Equivalents

   $ —      $ —      $ —      $ —  

Total Investments

   $ 2,445,898    $ —      $ —      $ 2,445,898
                           

Total Investments and Cash Equivalents

   $ 2,445,898    $ —      $ —      $ 2,445,898
                           

The following chart shows the components of change in our investments categorized as Level 3, for the fiscal year ended March 31, 2009.

 

     Fair Value Measurements
Using Significant
Unobservable Inputs

(Level 3)
 

Beginning Balance, March 31, 2008

   $ 3,233,548  

Total realized gains or losses included in earnings

     (124,971 )

Total unrealized gains or losses included in earnings

     (784,689 )

Purchases, including capitalized PIK interest(1)

     462,144  

Sales

     (340,134 )

Transfer in and/or out of Level 3

     —    
        

Ending Balance, March 31, 2009

   $ 2,445,898  
        

The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to our Level 3 assets still held at the reporting date and reported within the net change in unrealized gains or losses on investments in our Statement of Operations.

   $ (847,080 )
        

 

(1) Includes amortization of approximately $31,359

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

Note 7. Foreign Currency Transactions and Translations

At March 31, 2009, the Company had outstanding non-US borrowings on its $1,700,000 multicurrency revolving credit facility denominated in euros, pounds sterling, and Canadian dollars. Unrealized appreciation or depreciation on these outstanding borrowings is indicated in the table below:

 

Foreign Currency

   Local
Currency
   Original
Borrowing
Cost
   Current
Value
   Reset Date    Unrealized
Appreciation
(Depreciation)
 

British Pound

   £ 2,000    $ 3,565    $ 2,867    4/06/2009    $ 698  

Euro

   7,500      11,131      9,958    4/06/2009      1,173  

British Pound

   £ 2,500      4,957      3,583    4/17/2009      1,374  

Euro

   76,500      95,910      101,569    4/27/2009      (5,659 )

British Pound

   £ 37,500      59,395      53,751    4/27/2009      5,644  

Canadian Dollar

   C$ 29,700      25,161      23,606    5/20/2009      1,555  

Canadian Dollar

   C$ 22,500      19,189      17,883    6/05/2009      1,306  

Canadian Dollar

   C$ 3,000      2,318      2,385    6/30/2009      (67 )
                            
      $ 221,626    $ 215,602       $ 6,024  

At March 31, 2008, the Company had outstanding non-US borrowings on its $1,700,000 multicurrency revolving credit facility denominated in euros, pounds sterling, and Canadian dollars. Unrealized appreciation or depreciation on these outstanding borrowings is indicated in the table below:

 

Foreign Currency

   Local
Currency
   Original
Borrowing
Cost
   Current
Value
   Reset Date    Unrealized
Appreciation
(Depreciation)
 

British Pound

   £ 35,700    $ 72,891    $ 70,954    4/07/2008    $ 1,937  

British Pound

   £ 2,000      3,928      3,975    4/16/2008      (47 )

Euro

   1,000      1,463      1,584    4/18/2008      (121 )

Euro

   112,000      150,802      177,469    4/28/2008      (26,667 )

Canadian Dollar

   C$ 17,000      16,096      16,568    5/13/2008      (472 )

British Pound

   £ 2,500      4,957      4,969    5/13/2008      (12 )

Canadian Dollar

   C$ 29,700      25,161      28,946    5/20/2008      (3,785 )

Euro

   42,500      56,599      67,343    5/21/2008      (10,744 )

Euro

   2,000      2,961      3,169    5/28/2008      (208 )

Canadian Dollar

   C$ 22,500      19,189      21,929    6/05/2008      (2,740 )

Euro

   3,000      4,037      4,754    6/10/2008      (717 )

Euro

   3,500      5,025      5,546    6/18/2008      (521 )

British Pound

   £ 6,750      13,266      13,416    6/30/2008      (150 )
                            
      $ 376,375    $ 420,622       $ (44,247 )

Note 8. Expense Offset Arrangement

The Company benefits from an expense offset arrangement with JPMorgan Chase Bank, N.A. (“custodian bank”) whereby the Company earns credits on any uninvested US dollar cash balances held by the custodian bank. These credits are applied by the custodian bank as a reduction of the monthly custody fees charged to the Company. The total amount of credits earned during the years ended March 31, 2009, 2008, and 2007 are $217, $273, and $128, respectively.

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

Note 9. Temporary Investments

Pending investment in longer-term portfolio holdings, Apollo Investment may make temporary investments in U.S. Treasury bills (of varying maturities), repurchase agreements and certain other high-quality, short-term debt securities. These temporary investments are generally deemed cash equivalents as defined pursuant to FAS 95 and are included in our Schedule of Investments. At the end of each fiscal quarter, Apollo Investment considers taking proactive steps with the objective of enhancing investment flexibility in the next quarter. For example, Apollo Investment may purchase U.S. Treasury bills from time-to-time on the last business day of the quarter and would typically close out its position on a net cash basis subsequent to quarter end. Apollo Investment may also utilize repurchase agreements or other balance sheet transactions, including drawing down on its revolving credit facility, as it deems appropriate. The amount of these transactions or such drawn cash for this purpose is excluded from total assets for purposes of computing the asset base upon which the management fee is determined. Temporary investments with maturities of greater than 60 days from the time of purchase are marked-to-market as per our valuation policy.

Note 10. Repurchase Agreements

The Company may enter into repurchase agreements as part of its investment program. The Company’s custodian takes possession of collateral pledged by the counterparty. The collateral is marked-to-market daily to ensure that the value, plus accrued interest, is at least equal to the repurchase price. In the event of default of the obligor to repurchase, the Company has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the counterparty to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. There were no repurchase agreements outstanding at March 31, 2009 or March 31, 2008.

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

Note 11. Financial Highlights

The following is a schedule of financial highlights for the years ended March 31, 2009, 2008, 2007, 2006 and the period April 8, 2004 (commencement of operations) through March 31, 2005:

 

    Fiscal Year Ended March 31,     April 8, 2004*
through
March 31, 2005
 
    2009     2008     2007     2006    

Per Share Data:

         

Net asset value, beginning of period

  $ 15.83     $ 17.87     $ 15.15     $ 14.27     $ 14.06  
                                       

Net investment income

    1.48       1.82       1.49       1.41       0.41  

Net realized and unrealized gain (loss)

    (5.74 )     (1.90 )     2.11       0.49       0.31  
                                       

Net increase (decrease) in net assets resulting from operations

    (4.26 )     (0.08 )     3.60       1.90       0.72  

Dividends to stockholders(1)

    (1.86 )     (2.06 )     (1.96 )     (1.62 )     (0.48 )

Effect of anti-dilution

    0.11       0.10       1.09       0.61       —    

Offering costs

    —         —         (0.01 )     (0.01 )     (0.03 )
                                       

Net asset value at end of period

  $ 9.82     $ 15.83     $ 17.87     $ 15.15     $ 14.27  
                                       

Per share market value at end of period

  $ 3.48     $ 15.83     $ 21.40     $ 17.81     $ 16.78  
                                       

Total return(2)

    (73.90 )%     (17.50 )%     31.70 %     12.94 %     15.32 %
                                       

Shares outstanding at end of period

    142,221,335       119,893,835       103,507,766       81,191,954       62,554,976  
                                       

Ratio/Supplemental Data:

         

Net assets at end of period (in millions)

  $ 1,396.1     $ 1,897.9     $ 1,849.7     $ 1,229.9     $ 892.9  
                                       

Ratio of net investment income to average net assets

    10.71 %     9.85 %     9.09 %     9.89 %     2.96 %(3)
                                       

Ratio of operating expenses to average net assets**

    6.35 %     4.92 %     7.73 %     5.64 %     2.60 %(3)

Ratio of credit facility related expenses to average net assets

    2.54 %     2.73 %     2.49 %     1.44 %     —    
                                       

Ratio of total expenses to average net assets**

    8.89 %     7.65 %     10.22 %     7.08 %     2.60 %(3)
                                       

Average debt outstanding

  $ 1,193,809     $ 882,775     $ 580,209     $ 325,639 ***   $ 0  
                                       

Average debt per share

  $ 8.56     $ 7.88     $ 6.76     $ 5.10 ***   $ 0  
                                       

Portfolio turnover ratio

    11.2 %     24.2 %     43.8 %     39.2 %     14.7 %
                                       

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

 

(1) Dividends and distributions are determined based on taxable income calculated in accordance with income tax regulations which may differ from amounts determined under accounting principles generally accepted in the United States of America.
(2) Total return is based on the change in market price per share during the respective periods. Total return also takes into account dividends and distributions, if any, reinvested in accordance with the Company’s dividend reinvestment plan. Total return is not annualized.
(3) Annualized for the period April 8, 2004 through March 31, 2005.
* Commencement of operations
** The ratio of operating expenses to average net assets and the ratio of total expenses to average net assets is 6.33% and 8.87%, respectively, at March 31, 2009, inclusive of the expense offset arrangement (see Note 8). At March 31, 2008, the ratios were 4.91% and 7.64%, respectively. At March 31, 2007, the ratios were 7.72% and 10.21%, respectively. At March 31, 2006, the ratios were 5.63% and 7.07%, respectively. At March 31, 2005, there was no expense offset arrangement.
*** Average debt outstanding and per share is calculated from July 8, 2005 (the date of the Company’s first borrowing from its revolving credit facility) through March 31, 2006, and average debt per share is calculated as average debt outstanding divided by the average shares outstanding during the period (in 000’s).

Note 12. Credit Agreement and Borrowings

Under the terms of the amended and restated Credit Agreement dated March 31, 2006 (the “Facility”), the lenders agreed to extend credit to Apollo Investment in an aggregate principal or face amount not exceeding $1,250,000 at any one time outstanding. The amended Facility also permits Apollo Investment to seek additional commitments from new and existing lenders in the future, up to an aggregate amount not to exceed $2,000,000. In February 2007, we increased total commitments to $1,700,000. The Facility is a five-year revolving facility (with a stated maturity date of April 13, 2011) and is secured by substantially all of the assets in Apollo Investment’s portfolio, including cash and cash equivalents. Pricing is set at 100 basis points over LIBOR. The Facility contains affirmative and restrictive covenants, including: (a) periodic financial reporting requirements, (b) maintaining minimum stockholders’ equity of the greater of (i) 40% of the total assets of Apollo Investment and its subsidiaries as at the last day of any fiscal quarter and (ii) the sum of (A) $400,000 plus (B) 25% of the net proceeds from the sale of equity interests in Apollo Investment after the closing date of the Facility, (c) maintaining a ratio of total assets, less total liabilities (other than indebtedness) to total indebtedness, in each case of Apollo Investment and its subsidiaries, of not less than 2.0:1.0, (d) maintaining minimum liquidity, (e) limitations on the incurrence of additional indebtedness, (f) limitations on liens, (g) limitations on investments (other than in the ordinary course of Apollo Investment’s business), (h) limitations on mergers and disposition of assets (other than in the normal course of Apollo Investment’s business activities) and (i) limitations on the creation or existence of agreements that permit liens on properties of Apollo Investment’s subsidiaries. In addition to the asset coverage ratio described in clause (c) of the preceding sentence, borrowings under the Facility (and the incurrence of certain other permitted debt) are subject to compliance with a borrowing base that applies different advance rates to different types of assets in Apollo Investment’s portfolio. The Facility currently provides for the ability of Apollo Investment to seek additional commitments from lenders in an aggregate amount of up to $300,000. The Facility is used to supplement Apollo Investment’s equity capital to make additional portfolio investments and for other general corporate purposes.

The average debt outstanding on the credit facility was $1,193,809 and $882,775 for the fiscal years ended March 31, 2009 and 2008, respectively. The weighted average annual interest cost for the fiscal year ended March 31, 2009 was 3.89%, exclusive of 0.21% for commitment fees and for other prepaid expenses related to establishing the credit facility. The weighted average annual interest cost for the fiscal year ended March 31,

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

2008 was 5.96%, exclusive of 0.36% for commitment fees and for other prepaid expenses related to establishing the Facility. This weighted average annual interest cost reflects the average interest cost for all borrowings, including EURIBOR, CAD LIBOR, GBP LIBOR and USD LIBOR. The maximum amount borrowed during the fiscal year ended March 31, 2009 and 2008 was $1,685,285 and $1,655,805, respectively, at value. The remaining capacity under the facility was $642,399 at March 31, 2009. At March 31, 2009, the Company was in compliance with all financial and operational covenants required by the Facility.

Note 13(a). Income Tax Information and Distributions to Stockholders

The tax character of dividends for the fiscal year ended March 31, 2009 was as follows:

 

Ordinary income

   $  258,843
      

As of March 31, 2009, the components of accumulated losses on a tax basis were as follows:

 

Distributable ordinary income

   $ 85,743  

Capital loss carryforward

     (59,182 )1

Other book/tax temporary differences

     (44,466 )

Unrealized depreciation

     (938,304 )
        

Total accumulated losses

   $ (956,209 )
        

As of March 31, 2009, we had a post-October capital loss deferral of $61,725.

 

1 On March 31, 2009, the Company had a net capital loss carryforward of $59,182, which expires in 2017. This amount will be available to offset like amounts of any future taxable gains. It is unlikely that capital gains distributions will be paid to shareholders of the Company until net gains have been realized in excess of such capital loss carryforward or the carryforward expires.

The tax character of dividends paid during the fiscal year ended March 31, 2008 was as follows:

 

Ordinary income

   $  130,394

Long-term capital gains

     100,495
      

Total dividends paid

   $ 230,889
      

As of March 31, 2008, the components of accumulated earnings on a tax basis were as follows:

 

Distributable ordinary income

   $ 137,112  

Other book/tax temporary differences

     (18,210 )

Unrealized depreciation

     (204,909 )1
        

Total accumulated losses

   $ (86,007 )
        

As of March 31, 2008, we had a post-October currency loss deferral of $18,159.

 

1 The difference between book-basis and tax-basis unrealized appreciation is primarily attributable to the receipt of upfront fees, which are being amortized for US GAAP.

 

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APOLLO INVESTMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS (continued)

(in thousands except share and per share amounts)

 

Note 13(b). Other Tax Information

The percentage of ordinary income distributions paid during the fiscal year ended March 31, 2009 eligible for qualified dividend income treatment is 5.45%. The percentage of ordinary income distributions paid during the fiscal year ended March 31, 2009 eligible for the 70% dividends received deduction for corporate stockholders is 5.45%.

The percentage of ordinary income distributions paid during the fiscal year ended March 31, 2008 eligible for qualified dividend income treatment is 5.41%. The percentage of ordinary income distributions paid during the fiscal year ended March 31, 2008 eligible for the 70% dividends received deduction for corporate stockholders is 5.41%.

Note 14. Selected Quarterly Financial Data (unaudited)

 

Quarter Ended

   Investment
Income
   Net Investment
Income
   Net Realized And
Unrealized Gain
(Loss) on Assets
    Net Increase
(Decrease) In
Net Assets From
Operations
 
     Total    Per
Share
   Total    Per
Share
   Total     Per
Share
    Total     Per
Share